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Two Bidders Emerge for Vail Resorts; Might Dismantle
 the Company and Sell its Assets Piecemeal
By Jason Blevins, The Denver Post
Knight Ridder/Tribune Business News

July 30, 2004 - Two of the world's largest buyout firms have emerged as finalists for the purchase of Vail Resorts Inc., the Avon-based ski-and-resort giant that has been courting potential buyers for the past two months.

Sources close to Vail Resorts -- which owns the Vail, Beaver Creek, Breckenridge and Keystone ski areas in Colorado -- said two proposals for acquiring the company were submitted this week.

The company's board was expected to select a potential finalist within a week. Or, sources said, there is a chance the bids could be too low, and the board could choose not to pursue a sale.

More than three-quarters of Vail Resorts' stock is controlled by three entities: New York investor Ronald Baron, St. Louis-based Ralcorp Holdings and the New York investment firm Apollo Advisors, the company that brought Vail Resorts public in 1997 and still controls five seats on the company's seven-member board. All three declined to comment.

The two final bidders, according to six sources who spoke on the condition of anonymity, are the buyout firm Texas Pacific Group and Henry Kravis, a principal in New York investment firm Kohlberg Kravis Roberts, or KKR. It is unclear what either firm plans to do with Vail Resorts, which in addition to its ski business operates a growing luxury hotel and real estate business.

Some analysts suspect the buyout firms want to dismantle the company and sell its assets piecemeal. Besides the four ski resorts in Colorado, Vail owns the Heavenly ski resort at Lake Tahoe, on the California-Nevada border; a summer resort in Wyoming's Jackson Hole region; and the majority of RockResorts, a luxury hotel management company with 10 properties in California, Colorado, Florida, New Mexico, Vermont, Washington and Wyoming.

"I have to believe a buyer is looking to break up the company," said Salim Haji, a consultant with online investment publication Motley Fool. "Maybe there are strategic buyers lined up behind them willing to take a piece? Who knows. This is not a big cash generator, and just buying it and running it doesn't make sense to me." Officials from Texas Pacific Group and KKR declined comment.

Kravis, renowned for his role in the 1980s leveraged buyout of RJR Nabisco, owns a home in Vail. His firm recently sold Borden Chemicals, the final vestige of its RJR Nabisco acquisition, to Apollo for $1.2 billion.

Kravis also recently liquidated KSL Recreation Corp., a California resort company he formed in 1992 with former Vail Associates president Mike Shannon. KSL was worth $1.4 billion to KKR.

Kravis and Shannon may be working together on a bid for Vail Resorts, sources said. KSL's chief financial officer, Eric Resnick, the former vice president of strategic planning and investor relations for Vail Resorts, recently visited the resort company's headquarters to examine a potential acquisition, sources said.

Texas Pacific Group is a Fort Worth-based buyout firm with more than $13 billion in investments including Burger King, Continental Airlines and the J. Crew Group.

Vail is believed to have attracted as many as six potential buyers after the company hired the New York investment firm Lehman Brothers, formerly a unit of American Express Co., to prep it for sale. After more than one month of close examination of the company's finances, two suitors submitted bids, sources said. Lehman officials declined to comment.

The question is: Will those bids be high enough for Apollo, Baron and Ralcorp?

"It's a hot time for the leisure industry right now," said Mike Cahill, founder of Greenwood Village's Hospitality Real Estate Counselors, which provides consulting services for real estate acquisitions in the lodging and gaming industry. "What's happening is that major leisure companies are anticipating a pretty significant up-tick in the economy and they see the hotel business picking up. It's a good time for these kinds of deals."

Cahill was not aware of any developments in the potential Vail Resorts sale.

In recent weeks, as rumors of a pending sale escalated, the company's stock price has hovered above $19 -- at a two-year high. Following The Denver Post's coverage of a potential sale in early July, the company's stock reached a 52-week high. The company's New York Stock Exchange-listed shares closed at $19.10 on Thursday.

In the summer months, when the resort company spends millions in upgrades and has little revenue coming in, the stock price traditionally hits annual lows. Some of the suitors may have been deterred by the high stock price, sources said.

Financial data firm Bloomberg estimates Vail Resorts' enterprise value at $1.23 billion. Enterprise value is defined as the company's market capitalization ($648.1 million) plus total debt ($634.7 million) plus minority interest ($39.7 million) minus cash on hand ($94.9 million.)

Another way resort companies have traditionally been valued is using a multiple of cash flow, typically between seven and nine times. Vail Resorts' cash flow -- or earnings before interest, depreciation, taxes and amortization -- typically falls around $120 million, meaning its valuation would be between $840 million and $1.08 billion.

It's unknown whether the bidders plan to pay a premium on the existing stock price or the stock price before the sale rumors pushed it to two-year highs.

"I would expect a 15 to 20 percent premium on top of the current stock price," said Haji, who covers Vail Resorts for Motley Fool. "But that puts it at a pretty rich valuation." At that price, the company could fetch $1.4 billion.

Separately, cereal and snack food maker Ralcorp Holdings Inc. posted a 54 percent rise in third-quarter earnings Thursday, boosted in part by gains from the company's stake in Vail Resorts. The company recorded earnings of $8.9 million from its 21 percent stake, compared with profits of $5.3 million last year.

Also Thursday, Vail Resorts announced it had secured contracts for all eight townhomes in the first phase of a major real estate project in Lionshead Village. The expected $32.1 million in revenue from the sales marks a record $1,000 per square foot for real estate in the aging resort village.



--Senior partner, Kohlberg Kravis Roberts

--Age: 60

--Headquarters: New York

--Personal net worth: $1.3 billion


--Founder, Texas Pacific Group

--Age: 61

--Headquarters: Fort Worth, Texas

--Personal net worth: Estimated up to $1 billion

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