I had 10 days to get out of my house," George Gillett is explaining about his downhill run into bankruptcy. "I had to buy back my clothes. I had to buy back my dogs." Don't waste any sympathy on Gillett--he certainly doesn't expect any. Because Gillett is king of the hill again. Actually, 11 of them. His Booth Creek Ski Holdings Inc. has acquired 11 ski resorts in just over a year, the latest being Loon Mountain in New Hampshire. He's part of a trend in which four big companies--Vail Resorts, American Skiing, Intrawest and Booth Creek--are rapidly buying up ski areas. The four are banking on snowboarding youngsters and their two-planking boomer parents to create a new era of accelerating growth for a ski industry that has gone nowhere for a decade.
These companies are pouring record sums into capital improvements, adding fast chair lifts and such amusements as skating rinks and snow-tubing shoots to attract more nonskiing vacationers or at least divert them while their partners, spouses and children are on the slopes. The resorts aren't just competing against one another. Leisure dollars are also coveted by the cruise industry, which has spent billions upgrading its capacity, as well as by theme parks and other family destinations.
Gillett's riches-to-rags-to-riches story is a perfect proxy for the way capital has snowballed down Wall Street in the past two decades--and by the way, don't expect a moral to this tale. In the 1980s Gillett was busy building a billion-dollar empire based on the odd combination of meatpacking and television stations, much of it financed by the junk bonds of Drexel Burnham Lambert, led by the now infamous Michael Milken. Drexel pumped out high-risk securities the way snowmaking machines create instant winter. Gillett, a Wisconsin boy, loved to ski, and he loved to ski at Vail, a powdery paradise in the Colorado Rockies. So he bought the joint in 1985.
The whole mess came crashing down in 1991, when Gillett, having overpaid for yet another television station, found himself looking at interest rates for his junk bonds that had spiked above 17%. "When the notes came due, we were dead," he says.
Fast-forward to 1997, when the ski industry, not to mention the junk-bond industry, has come full circle. Gillett the Bankrupt has had "little" difficulty raising $162.5 million in investment capital, and he is assembling another empire, this one built around medium-size properties near big cities to capture the day trippers and weekenders who account for nearly half the ski business. He bought back his old meatpacking operation in 1994 and added adornments such as a barge business in the Pacific Northwest and a group of golf courses in Montana. Have the bankers lost their marbles again? Yes and no. Sure, Gillett went bust by taking on too much debt, but he was a proven operator who increased Vail's yearly profits from $5 million in 1985 to more than $45 million in 1991--still not enough to avert catastrophe.
Yet Gillett is on financing's bunny hill compared with Leon Black, founder of Apollo Ski Partners, an investment fund that is Vail Resorts' largest shareholder. Black, who was Milken's right-hand man at Drexel, scooped Vail out of bankruptcy and then acquired Breckenridge and Keystone from Ralcorp Holdings to create an industry giant. With the stock market rising, Black took Vail Resorts public last February, raising $266 million--$64 million of it going to Apollo Ski Partners. Vail Resorts is currently valued at $900 million, and its stock, which went public at $22.50, has been trading in the mid-20s.
Gillett didn't stay buried for long. Black kept him around to run Vail for $1.5 million annually plus stock options that ultimately yielded $32 million. That was seed money for Gillett to start a second empire, this time by forming Booth Creek.
The top four resort operators, with Vail and Booth Creek among them, control 31% of the ski business at the country's 507 resorts, and these operators are still buying. "It's an easy time for financing," observes Leslie Otten, fresh from an acquisition binge that netted his Maine-based American Skiing (estimated revenues: $350 million) major properties in Colorado (Steamboat), Utah (the Canyons) and California (Heavenly). With nine resorts and 4.92 million skier visits annually, onetime lift mechanic Otten lays claim to being the country's top alpine-resort operator. "The industry has learned how to get into the high-yield bond market and take advantage of initial public offerings," he says.
And how. Vancouver-based Intrawest raised $88 million in a stock offering last March to move ahead with real estate development at 10 Canadian and U.S. resorts. Last month Intrawest boosted its ownership of Mammoth Mountain in California to 51%. And the company isn't finished either. "We are definitely on the hunt," says executive vice president Daniel Jarvis.
The resort operators are convinced that despite stagnant growth for the past 10 years, the ski industry is poised for a period of grand new development. They cite the coming of age of a giant crop of potential new skiers, the children of the baby boomers. These three-to-20-year-olds, the echo boomers, total 72 million, 60% more than the number of Generation Xers, and many are avid snowboarders.
The boomers, as they push into their 50s, are becoming prime prospects for an emerging adjunct of the ski-resort business: sales of year-round second homes and condos. "There's a realization that you can't live on lift tickets alone," says Michael Berry, president of the National Ski Areas Association. "Today's ski company needs to be retailer, hotelier and developer to maximize revenues per skier visit."
Toward that end, Vail has bought two hotels and is adding nine new restaurants as it embarks on a string of renovations and additions. Many of them, like a dance club, an expanded ice rink and a performing-arts center at nearby Beaver Creek, are directed as much at nonskiers as skiers. "Increasing our share of mountain business is an easy area of opportunity," says Vail Resorts CEO Adam Aron, who notes that nonski revenues are growing twice as fast as those from lift tickets and now exceed them. "There are other ways to win than skiing."
The irrepressible Gillett is a good bet to explore all avenues. By acquiring relatively modest sites like New Hampshire's Waterville Valley and Mount Cranmore, and California's Northstar-at-Tahoe and Bear Mountain, Gillett is hoping to create high-volume regional resorts within driving distance of major population centers--attractions for day skiers. "You've got to start somewhere," he says of this strategy.
Gillett personally relishes skiing "steep and deep," which is not a bad metaphor for his investment style. Like his earlier Vail venture, Gillett II rests on a mountain of junk securities, although these cost a mere 12.5% interest, well below the nosebleed rate for his last go-round. And this time he has two big partners: the John Hancock Mutual Life Insurance Co., which owns 50% of the ski operations, and the Canadian Imperial Bank of Commerce, which has 10%. Says Gillett, who has a hard time containing his optimism: "The demographics are with us. Skiing is at the same point it was 25 years ago--at the brink of another great growth period." The only thing he's missing, he concedes, is a signature resort like Vail.
This time around Gillett is taking precautions, separating his various ventures so that a mishap in one can't pull down the others. Running ski resorts has become a family affair, with Gillett drawing on the active participation of his wife Rose and their four sons, ages 22 to 27. Still, he confides his weakness for sometimes moving too fast and buying too much. "I've lived my dreams, but then I blow them up." How comforting that must be to his bond holders.
--Reported by Richard Woodbury/Vail