Rescuing This Japanese Resort Won't Be A Picnic

Can Ripplewood's Collins turn a profit with a failed vacation complex in Kyushu?

It boasts 99 holes of golf spread out over four courses, views of the Pacific to die for, and the world's biggest indoor water park. Yet the Phoenix Seagaia Resort, situated on 3,000 hectares of land on the southern Japanese island of Kyushu, has been a money trap since it opened in 1993. Built for $1.5 billion, it went bust -- spectacularly -- in early 2001 after amassing $3 billion in debt. That year, Ripplewood Holdings CEO Timothy C. Collins swooped in, picking off the entire sprawl for a paltry $120 million.

Ripplewood is well known both in Japan and the U.S. for turning corporate lemons into lemonade. It turned around moribund Long-Term Credit Bank of Japan, since renamed Shinsei Bank, and recently floated to wild acclaim on the stock exchange. Ripplewood has made other bold acquisitions, most recently spending $2.2 billion on the fixed-line assets of Japan Telecom Holdings Co. No doubt about it, Collins is the gaijin with the magic touch. Yet his venture into the Japanese resort business has proved to be a daunting challenge.

The grand vision: Turn a shoddily run, government-owned resort into a premier domestic and international vacation and convention center, serving not only Japanese golf fanatics but also tourists from Southeast Asia and China. The resort certainly has potential. It now houses two Sheraton hotels, a 5,000-guest conference center, riding stables, bowling lanes, and the 27-hole Phoenix Country Club, where tournaments attract the likes of Ernie Els and Tiger Woods. "We're trying to create a category -- a destination resort -- that didn't exist in Japan," says Hiroshi Nonomiya, a managing director with Ripplewood in Tokyo.

The man whose job it is to make that happen is Michael F. Glennie, who became Phoenix Resort's president and CEO in 2001 after managing a $1 billion portfolio of leisure properties for Boca Resorts Inc. (RST ) in Florida. An old fishing pal of Collins, the dapper Brit says the resort hemorrhaged cash in its early years because it acted like a government agency, awarding big supply contracts to politically tied suppliers at high prices. Also, the managers of its reservation system failed to tweak room rates to meet fluctuations in seasonal demand -- a no-brainer in the hotel industry. To change all that, Glennie brought in Starwood Hotels & Resorts Worldwide Inc. (HOT ), owner of the Sheraton hotel chain, to manage the property. Starwood restructured room rates and other operations, in the process slashing the bloated workforce by 40%, to 1,500. "You wondered: Where did they all fit?" Glennie says.

Glennie's challenge now is to find new Seagaia guests and persuade existing ones to extend their stays. The average stay for Japanese guests is a piddling 1.2 days, as compared with three to five days in other U.S. resorts. So Glennie has established a golf academy, where duffers spend a few days taking lessons before tackling a championship-quality course. To pull in more family visitors, a major face-lift of the Ocean Dome water park is scheduled in 2005. Ripplewood is also spending $32.6 million to build onsen, or hot-spring baths, luxurious hotel rooms, and an organic food restaurant, by October.

UPGRADES GALORE. But despite all the cutbacks and changes, Seagaia is still not profitable. Ripplewood insists the resort will be in the black by yearend, but Motoya Kitamura, a researcher who follows private-equity deals for Mitsubishi Research Institute, has his doubts. "It is far away from Japan's central cities," he notes, "and it doesn't have a specific attraction to pull in enough people." Others note that Japanese prefer to vacation overseas.

Ripplewood execs insist they are not discouraged. But Glennie admits it will take two or three more years of remodeling and upgrades -- the total is expected to almost reach $100 million -- before it makes sense to put Seagaia on the market. By then, the rest of the world will know whether Ripplewood's plunge into the Japanese resort business was a masterstroke -- or a rare misfire. Extra towels, anyone?

By Ian Rowley in Kyushu, Japan

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