Deals of the Year: Middle Market Deal –

Most buyout firms makeover a company, but few aim to makeover an entire town. That’s just what Starwood Capital plans to do with its purchase of what is often referred to as a “cultural icon,” California’s Mammoth Mountain.

With 185 ski trails and a price tag of $365 million, it is the largest single asset ever sold in the ski industry. The deal featured the return of Barry Sternlicht, who left Starwood Hotels & Resorts last spring to return to investing full time with his private equity firm. He was critical to making the deal happen after Starwood Capital left the bidding process and then returned. The deal was also financed by the first commercial mortgage backed security (CMBS) ever used in the ski industry.

Everything about this deal is one-off. Even the town of Mammoth Lakes is unique-tucked into the Eastern Sierra Nevada mountains, it is about four square miles with half a dozen traffic lights. Five hours north of L.A., the 7,900 foot high mountain has about as many permanent residents as it is feet above sea level. It is surrounded by publicly-owned land which can’t be built on, making it a kind of island of development in a wilderness of spectacular scenery.

Starwood bought the property from both Intrawest Corp. and Mammoth Mountain’s beloved 90-year-old founder, Dave McCoy, who reportedly pocketed $80 million.

The debt structure is new to the ski industry. Starwood had experience with a CMBS financing when it bought National Golf Properties with Goldman Sachs in 2002, but in the ski industry most deals haven’t been large enough to justify one. A CMBS is a securitized mortgage that is rated. The financing is based on operating projections of the company and therefore can take on some of the nuances of the ski business. For that reason, Sean Arnold, a vice president of acquistions in Starwood Capital’s San Francisco office, said the financing was more forward looking and better suited to the deal than traditional financing.

The multiple on the deal was 10x EBITDA, which is above the industry average of about 8.5x, said Arnold. But, he added, “this is the single largest growth opportunity for a mega-resort in the industry.” Typical growth for the industry is 1% to 5% per year, while Mammoth is showing 10% growth per year, he said. Mammoth did $33 million in EBITDA last year and this year the goal is $40 million EBITDA.

Changing Demographics

Starwood’s strategy with Mammoth highlights some changing demographics of the ski industry. The industry boomed with the boomers in the ’70s and ’80s, but as that generation ages, they are outgrowing the rigorous sport. But since they still want to go to the mountains, ski resorts are changing to cater to their wants, shifting focus away from the slopes and towards the shops, the restaurants and general high class treatment.

Arnold pointed out that ski visits nationwide have been ticking upwards in the last few years and that there have been ski technology improvements such as parabolic skis to help older people manage the slopes better. But most importantly, said Arnold, “This wasn’t a big industry bet for us. It was really a bet on Mammoth, which has a great captive Southern California customer base that loves to recreate and has a lot of money to spend.”

Arnold said Starwood initially dropped out of the Houlihan Lokey Howard & Zukin-run auction process for a few reasons. Mainly, Intrawest had the right to trump all offers after it saw where bids came in. Starwood didn’t think it was worth their time.

But here’s where Sternlicht’s return to Starwood was instrumental. Sternlicht knew Joe Houssain, chairman of Intrawest, from work they did together when Sternlicht was at Starwood Hotels. When Houssain heard Starwood was backing out, he changed what was for sale, throwing in some real estate in town in town as well. Mammoth operates on a permit from the U.S. Forest Service, and the “owner” of the mountain only owns the buildings on it, but not the land itself. Making the real estate part of the deal was a key component, said Arnold.

“[Adding the real estate] was something he was specifically talking to Barry about in order to keep our interest,” said Arnold.

There was plenty of competition for the property during the auction. Reportedly, Texas Pacific Group, Michael Dell and North America’s largest ski mountain, Vail, all showed interest in the deal. Arnold said the bidding came down to Starwood and one other LBO shop. Starwood won the auction with a $365 million bid. The price also included the property it bought from Intrawest.

Branding A Town

Starwood recently unveiled its designs. During a meeting with civic leaders, Sternlicht said a California-type, timber and glass architecture will help give the town a distinctive feel. “It’s almost like a branding campaign,” he said, one that hopefully will involve all the builders in the community. Much of the architecture now is utilitarian, built in the ’70s, and does not have, as Arnold put it, “an updated destination-resort feel.” Arnold said Starwood will “give the town more of a sense of place.”

Starwood is also working on making Mammoth more accessible from L.A., which is a five-hour drive away. Starwood is lobbying for airlines to schedule two flights per day to the town’s Mammoth Yosemite Airport that hasn’t seen commercial flights in a decade.

Starwood is also processing entitlements on a new base lodge, which will have condominiums and a hotel. Overall, the LBO firm hopes over the next five to seven years to increase the bed base by 40%, or roughly 6,000 units. Starwood is also working on a separate transaction with Intrawest to recap the latter’s land holdings and develop another condominium/hotel complex.

Taking the 10,000 foot view of the 8,000 foot mountain deal, Arnold mused, “All the right things were wrong here. They were all fixable problems. It’s probably the country’s best ski mountain. What’s left to do is to give it a unified theme.”