Club Corp Headed For Breakup?

Greg Roumeliotis and Lauren Hirsch of Reuters report that investors are pushing for ClubCorp to be broken up and that the company has formed a committee to carry out a review.

They write:

It is a serial acquirer in the golf course industry, buying 12 new clubs in 2015 and 2016. It looks to buy locally-owned golf courses and then refurbish them by adding or improving amenities such as up-scale dining and event rooms.

Shareholder FrontFour Capital Group LLC in September published a letter highlighting ClubCorp's low trading multiple as compared with leisure industry peers such Six Flags Entertainment Corp (SIX.N). It questioned some of its business decisions such as ClubCorp's model to pour money into refurbishing its golf course acquisitions.

"It is obvious to us that ClubCorp's reinvention capital expenditures are transformative in nature and are in no shape or form 'maintenance,'" the letter wrote.

How dare they try to transform their properties for a new generation!

Private equity firm KSL Capital bought ClubCorp for $1.8 billion in October 2006 before taking it public in 2013. The company operates more than 200 properties but it saddled with major debt issues.

Comments

[Pat(another one)]

Ah yes, another private equity "great deal" that sticks the company with a ton of debt so the privates get their money. Everyone wrote off Sports Authority's demise to "brick and mortar retail is just not a business to be in nowadays," when in fact, if you strip out the costs associated with the debt from being taken private, they were a viable business.

Would love to know the details on this one.

[Long Ball]

As Pat alluded, this another sell the living carcass trade, advertised as a "strategic review." The only people who will profit will be KSL and their management team. Operationally, Club Corp will look fine on the surface (Lipstick on a Pig).. Under the hood, the $1B+ debt is like a big inoperable tumor that will eventually strangle the company unless one of three things happen:

1) Larger and dumber sucker buyer shows up and pays stupid price to assume the debt and buys this pig. 25% chance

2) Land valuations (already over-optimistic and mostly unrealizable) increase substantially and become liquid enough to sell off with proceeds used to retire the debt. 5-15% chance

3) Company pulls in it's expansionist reigns, reduces the dividend (ALMOSTNEVER happens while KSL is largest shareholder) and whittles down the debt. 5-15% chance.

Fourth and most likely result:

Company eventually liquidates and/or sells off enough of their assets to address--reduce--eliminate the debt. Another private equity firm "makes America great again" and come in to buy-up the remaining carcass.

Rinse-Wash-Repeat

PS....First time I've ever heard of portfolio of golf and private clubs being measured against a portfolio of Amusement parks.

PSS.. Intrawest, the owner of multiple ski resorts announced they are shopping for a buyer as well.......

Good Luck with all of this!!

[KLG]

Vampire capitalism in action, except those who get bitten die, while the vampires move to the Hamptons and find themselves right at home. This will end well for the PE twits and no one else. And really? Six Flags? Anyway, I know one GM, two head pros, 3 assistant pros, and two superintendents, not to mention a bunch of F&B and maintenance staff, who should start looking elsewhere. Now.

[Don]

Buying and owning golf courses, which have been dropping significantly in value, is not a strategy that suggests success.

[BrianS]

@Long Ball +1. Agree with your recap. I"m not knowledgeable about the private club industry - are there other aggregators that have stayed independant and don't have the debt burden ?

I guess bottom line question: Does/can a well managed club in a reasonable location make realistic numbers going forward ? It seems like they should be able to do so, it seems that some certainly do.

[Eric the Red]

@Long Ball
Tremendous post. Your percentage chances of the scenarios are right on the nose.

[KLG]

"Does/can a well managed club in a reasonable location make realistic numbers going forward?"

Yes, depending on the definition of "realistic." The problem is that nothing realistic can pay the debt incurred in these transformations that PE "engineers" so that they get paid first and always, while it's "devil take the hindmost" for those who remain, among the ruins. Grow the game, indeed.

[The O]

@Don, they make it up in volume!

[Alec]

Shocking lol, live by the quarterly die by the bonus structure. Make sure to pack those golden parachutes and since when are private country clubs for profit businesses? Oh yeah I forgot we're in 21st century America.

[Neil Young & Geraldo]

Can somebody above please explain how the private equity firm will come away with the money/profit and not the debt?

Is it simply that they've been paying themselves hefty management fees and pulling out profits from club corp for the past 10 years and now are ready to let it go bankrupt? (i.e., sucking it dry). Or is it after the sale of the company that they will make their money? Or perhaps something else?

Thanks in advance-- not a finance guy here!

[ol Harv]

"and since when are private country clubs for profit businesses? Oh yeah I forgot we're in 21st century America."

Exactly.

[KLG]

NY&G: not a finance guy either, but this is how it's generally done, as in the example of Simmons (Beautyrest)...from Wikipedia:

"The company suffered financially under the successive ownership of multiple private equity firms and other private investors. The private equity owners extracted $750 million in profits out of Simmons, while the company's debt increased from $164 million in 1991 to $1.3 billion in 2009.[7] On September 25, 2009, Simmons announced a Chapter 11 restructuring plan and signed a purchase agreement with an investor group led by Ares Management and Ontario Teachers' Pension Plan.[12] The bankruptcy court approved the deal, reducing the company's total debt from about $1 billion to $450 million."

Jobs, pensions, etc. disappear with the bankruptcy, making the new "owners" rich. Rinse, repeat until nothing's left. No accident that a major PE group is named for the three-headed dog that guards the gates of hell, to prevent the dead from escaping.

[Bradley]

@ KLG
How do pensions disappear?

[Priussmug]

I'm shocked that a member driven product that has an enormous amount of waiting to sell members could be in trouble
while touring the growth of memberships all the time, it was always don't look at the details. Buying clubs to increase member numbers all while having an ever growing listing of members who want out, without enough incoming to replace them.
Rough economy to be trying to pull a lot of this in golf

[Curious]

"The only people who will profit will be KSL and their management team."

I'm having trouble understanding how money flows will go toward KSL at this point, could you enlighten me?

[Pat(another one)]

What I understand from the process is that the PE firm buys out the company. Then they turn around and issue debt, which they basically use to pay themselves. *That's* where they get paid from what I understand. If the business is a good one and succeeds, they can double dip by making money off the sale price as well, but it's that first cash that guarantees they are in the black.

How I understand it.

[Pro From Dover]

"Mamma, don't let you babies grow up to be golf course owners........."

Perhaps in segmented markets, but otherwise, there is no noticeable uptick in golf rounds or measurable increase in golf memberships nationwide. The fine, old established clubs will survive....the middle range clubs and mom & pop facilitates will continue to struggle and diminish. Have just been through tax appeals for numerous clubs / courses and 'won' all appeals and recieved huge saving in new appraisals. Values are not appreciating in our markets.

Good news is, Bod Dedman, Sr. (ClubCorp) had set up Pinehurst Resort & CC as a separate entity when they purchased it, and carved it out of the portfolio that was sold to KSL.

[ChuckDietzenTNnotIN]

It would seem the creditors who loan the money should understand the risk and factor in a higher interest rate, accounting for the increased loan risk. Likewise, other non-PE investors should understand the practice of PE firms who, once they have a controlling stake in the company, take over management (and recoup their investment with high, self compensation).
Those non-PE investors should either dispose of the investment or assume the risk of later bankruptcy.
The unfortunate losers are those employees whose jobs are eliminated by cutbacks or closures carried out to prevent or settle bankruptcy.

I may have it wrong, but that's the way I interpret this.

[Don]

How to extract money.:

Buy ClubCorp
Issue debt (borrow), based on inflated valuation of assets (courses). Offer higher interest rates, if necessary
Sell some of the assets to raise additional cash
Cut back on capital and operational spending
Extend accounts payables to the point where suppliers start to stop delivering
Pay yourself big management & other fees for as long as you can
Declare bankruptcy & get out

There is always some market for debt. Relatively high interest rates help.
Debt owners get pennies on the dollar. Other creditors get nothing.

[Jds]

These are all likely 'for profit` entities that the PE firms are buying. I don`t think a non-profit could hold that status while being acquired.

[Mr. PPS]

@Long Ball ... good post but to make it even better, it's PPS, not PSS. This is b/c it's Post (after) your Post Script. Hence, PSS (Post Script Script makes no sense). Now, you can help others! Cheers!