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Slats Grabski

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I ran into Slats in the bar at The Lodge at Whale before Thanksgiving. "Heya," he said, lifting his beer.

"Heya yourself," I said. I was tired. The skiing was way too good for this early in the year. "What's up?"

"I've decided to buy the lift company."

"Which one?"

"This one. Whale."

"Right. When? How?"

"Oh, three to five years maybe. I figure it will be for sale by then. Want in? I think I need about 1000 stockholders."

"Explain this, please."

"Have you read Downhill Slide yet?"

"Um, no."

"You gotta read it. It says nothing we didn't already know, but when Wall Street gets it, this company is headed for big changes."

"Like?"

"Like getting out of the ski business and finishing up its transition to running lots of resort hotels. It's gonna unload most of the ski hills."

"How do you know this?"

"It's happened before. Remember when all the industrial conglomerates dumped their ski and boot companies back in the late '70s? Olin, Questor, Kingsford, Beatrice Foods, Cummins Diesel, Northwest Energy, AMF, Hexcel - they all bought or started factories. After five years, they saw how thin the margins were and how little growth there was, and bailed out."

"And now?"

"If Hal Clifford's book didn't put it across straight enough, the analysts would have figured it out eventually, after they quit spinning around over Enron. You can't squeeze 15% ROI out of a ski hill. You can come close by soaking up all the retail space and pillows, which pushes out the native merchants. But once all the profitable businesses are folded in, there's no more growth. That's why the stock prices are static. So the corporation is going to morph itself into year-round resort operations, probably near the coastal population centers. They'll dump the low-margin divisions like the lift company, and keep the high-margin hotels."

"But they need the mountain to make the other businesses viable."

"Don't be stupid. The mountain isn't going away, and it will still pull business into town. The buyer will run it, and the buyer will be happy with a 5% ROI. Whale can put the purchase price into something elsewhere that will turn 20%."

"And you're the buyer?"

"Me and 999 buddies."

"Why will you be happy with 5% return?"

"Because we're skiers. We came to live here, not on Central Park West. We decided in our youth that skiing every day is better than selling stock. We built up our little local businesses and are happy to invest in the town's future."

"Very creditable. How much is my buy-in?"

"Okay, follow along carefully here. Whale sold about $56 million in lift tickets last year. Let's add $10 million for ski school revenues. Ignore the hamburgers - I don't wanna be in the food business, no matter how profitable it is. So that's $66 million in revenue, and it ain't gonna grow because nothing in this business does. The corporation's gross margin, on lodging, retail, rental, everything, is about 19%, but you and I know that the lift operation probably has a net of 5%. Five percent of $66 million is $3.3 million. Now if we wanted to earn $3.3 million on some other business, at a healthy 15%, we'd expect to invest $22 million. Got it?"

"Umm, yeah."

"So that's what the lifts and ski school are worth if Whale was gonna sell them."

"Umm, sounds cheap."

"It's cheap. Your share is $22,000, and you get a season pass as long as you own the stock. And the beauty is, we won't drive your dry cleaning store out of business. The corporation still has the hotels and some retail space, but this is no longer a company town."

"I don't buy it. Whale just bought Infernal Peak for 6.2 times revenue. If Whale's revenue is what you say it is, they'll want something over $400 million."

"It's negotiable. So we'll sell 2000 shares, or 4000. The point is, you could take a home equity loan and buy in. And maybe we'll throw in a parking spot."

"I could probably find 4000 people in the valley who would go for that."

"You ain't kidding. Look, I think real estate here has peaked. I'm going to unload a couple of my condos for a quarter mil each, and sit on the money. When the corporation wakes up, there I'll be. Or there we'll be. The town lost a big chance in '93 when it could have bought the mountain out of bankruptcy. We won't make that mistake twice."

"And when is this gonna happen?"

"Sooner than you think. Look, lift tickets are about 38% of revenues right now, but it's not growing. Hotel revenues are growing 120% a year - of course, they're buying hotels right and left, but that's where the margin is. Retail revenue is up to 20% of the company's gross and growing, and gross margin in that business is about 37% if you're not stupid. Stands to reason the company is gonna expand those businesses and dump the losing divisions."

"So how do you explain that they just bought Infernal Peak?"

"They got a bargain, for exactly the same reason we'll get Whale at a bargain. The previous owner needed the cash for other purposes. Whale is smart enough not to wait that long."