Apollo Group looking to buy HGVC [Merged]

[dayooper]

Another point is I do not see in the agreements where a resort like Las Vegas Boulevard is required to stay in any system. It is completely sold out and run by the HOA, and HGVC is under a year-to-year agreement to operate a timeshare function out of it. I don't know about other resorts, but if DRI tried to degrade this property or crank the MF's it could walk. This is of course extreme thinking, but at the end of the day I bought into a quality property for a great price, and I feel it is in a good position going forward.

Flamingo has been sold out for years. I was wondering that as well.

 

[JIMinNC]

Another point is I do not see in the agreements where a resort like Las Vegas Boulevard is required to stay in any system. It is completely sold out and run by the HOA, and HGVC is under a year-to-year agreement to operate a timeshare function out of it. I don't know about other resorts, but if DRI tried to degrade this property or crank the MF's it could walk. This is of course extreme thinking, but at the end of the day I bought into a quality property for a great price, and I feel it is in a good position going forward.

Flamingo has been sold out for years. I was wondering that as well.

Just because a resort is sold out does not mean the developer does not still have de-facto control of the Board. HGVC still owns inventory as a result of ROFR, upgrades, etc. In addition most large developers who are engaged on ongoing sales at a location will hand-pick Board candidates who will vote their interests and the ballots don't disclose which candidates have the strongest developer ties. For something like this to happen, an HOA would have to organize in ways that timeshare HOAs rarely do, and wrest control of the Board from the developer by electing candidates who favor a change of property manager. Given the large number of owners and fragmented nature of timeshare ownership, that is historically very hard to do. Affiliates that have a weaker tie to the developer - like the HGVC affiliates in SW Florida - are a different beast, and tend to be more owner-controlled I suspect.

I know from our years as a Diamond owner up until 2014, in their system, two or three Board members at our home resort on Maui were actually Diamond employees.

 

[Ralph Sir Edward]

If memory serves me, Bay Club is similar to the SW Florida affiliates.

In addition, you don't even have to join HGVC to own at Bay Club. (I don't).

How that would work out would be very interesting. . . .

 

[CalGalTraveler]

That is one of the three options stated in the news article. "merge the company [HGV] with smaller Apollo-owned rival Diamond Resorts and keep the combined business public..."

I certainly hope HGVC would take over Diamond and bring it up to HGVC standards and not vice versa. What is odd is that they refer in the article to Diamond as smaller than HGVC but the information on EBITA suggests the opposite:

"[HGVC] EBITDA to be between $379M and $399M. Diamond's is projected to be about $420M."

 

[JIMinNC]

HGV's recent guidance projects adjusted EBITDA to be between $379M and $399M. Diamond's is projected to be about $420M. Marriott paid over 10x EBITDA for Vistana and Bluegreen sold for 9x EBITDA after it went public in 2017. This would put the combined company's value somewhere between $7B and $8.2B. (HGV's current enterprise value is $3.9B.)

Unless a recession comes, I think these are reasonable valuations if Apollo can sell it to Wall Street.

Makes sense that would be the target valuation they would want to try to build the combination too. If they were to wind up with both for a total investment of $4.6 billion (theoretically) and then in a number of years sell the combined entity or take it back public at an $8 billion valuation, that would be a reasonable goal for them.

Though I wouldn't be so quick to assume that Apollo sees HGVC management and the HGVC business as their silver sword to "fix" Diamond. HGVC has it's own issues and disappointed during the last two earnings quarters. They seem to be struggling matching their available inventory type to the demand. They received a lot of push-back on their last earnings call for not having a trust product and being dependent on location-based sales. Their faster-than-expected sell-out of the high-$$$ Ocean Tower on the Big Island has caused a huge hole in their high-end inventory supply in that market that won't be filled until 2020. I could actually see Apollo licking their chops over overlaying the Diamond trust-based sales/re-sales model onto HGVC's higher-end inventory as a way to rapidly grow revenue predictability and more rapidly recoup their investment in both entities.

 

[dayooper]

Makes sense that would be the target valuation they would want to try to build the combination too. If they were to wind up with both for a total investment of $4.6 billion (theoretically) and then in a number of years sell the combined entity or take it back public at an $8 billion valuation, that would be a reasonable goal for them.

Though I wouldn't be so quick to assume that Apollo sees HGVC management and the HGVC business as their silver sword to "fix" Diamond. HGVC has it's own issues and disappointed during the last two earnings quarters. They seem to be struggling matching their available inventory type to the demand. They received a lot of push-back on their last earnings call for not having a trust product and being dependent on location-based sales. Their faster-than-expected sell-out of the high-$$$ Ocean Tower on the Big Island has caused a huge hole in their high-end inventory supply in that market that won't be filled until 2020. I could actually see Apollo licking their chops over overlaying the Diamond trust-based sales/re-sales model onto HGVC's higher-end inventory as a way to rapidly grow revenue predictability and more rapidly recoup their investment in both entities.

This is my fear. If this is the case, and they remove the ability to use the club, it’s RCI for me!

 

[CalGalTraveler]

@JIMinNC that explanation makes sense. With HGVC Maui Villas sounding like it will be delayed or reduced due to local opposition, Diamond has some nuggets in their portfolio that could be renovated/upgraded to HGVC standard and resold rapidly. Specifically:

* Kaanapali Beach Club on Maui
* Embarc / former Interwest properties (Whistler, Calif Desert, Ixtapa, Eastern Canada etc.)
* Lake Tahoe Resort (former Embassy Suites).
* The Modern Honolulu which is only 1 block away from HHV.

What other Diamond properties/locations would add significant value to the HGVC portfolio?

 

[JIMinNC]

This is my fear. If this is the case, and they remove the ability to use the club, it’s RCI for me!

Waaaay to early to get spun up over what may happen. It's still just a rumor - maybe a credible one, but a rumor nonetheless. It may or may not happen, and if it does, we won't know for a long time what the impact will be on HGVC.

 

[JIMinNC]

With HGVC Maui Villas sounding like it will be delayed or reduced due to local opposition,

I'm not sure I would agree that it "sounds like" that project will be delayed or reduced. Yes, the discovery of some bones near the edge of the property has given the local anti-development groups a reason to again raise issues, but no permits have been revoked (at least so far) and construction is proceeding. Given the anti-timeshare bias on Maui, it is certainly "possible" that roadblocks could be erected in the path of this project, but I don't think it's accurate to imply that is likely to be successful, at least based on what we know now.

 

[dayooper]

Waaaay to early to get spun up over what may happen. It's still just a rumor - maybe a credible one, but a rumor nonetheless. It may or may not happen, and if it does, we won't know for a long time what the impact will be on HGVC.

Oh, I know. Hopefully it’s just a rumor from the Apollo side and HGVC has a contingency plan (or the whole thing gets debunked). That being said, I’m not paying more money to use what I already own. That’s Diamond’s MO. I see them as locusts who devour everything in their path. Jack up MF’s and bully owners to pay more money by making their ownership so worthless they have to throw more money to make their original purchase retain any value.

 

[csodjd]

I'm not sure I would agree that it "sounds like" that project will be delayed or reduced. Yes, the discovery of some bones near the edge of the property has given the local anti-development groups a reason to again raise issues, but no permits have been revoked (at least so far) and construction is proceeding. Given the anti-timeshare bias on Maui, it is certainly "possible" that roadblocks could be erected in the path of this project, but I don't think it's accurate to imply that is likely to be successful, at least based on what we know now.

Agree. They’ve had a lot of time to raise objections and slow or stop HGVC from proceeding. Now construction is underway, and to get a Court to block work would be difficult given the harm it would cause to the developer at this point. They’d probably have to show some kind of fraud by the developers in the approval process.

 

[brp]

They’d probably have to show some kind of fraud by the developers in the approval process.

If they had the timeshare salesweasels negotiating the contract and approval process, finding inaccuracy and fraud might not be that hard

Cheers.

 

[Bao Nguyen]

I hope just a rumor too. I just checked Diamond resorts in Hawaii and none of them looked nice. https://www.diamondresorts.com/destinations/property/The-Modern-Honolulu
Read the red banner.

 

[1Kflyerguy]

Waaaay to early to get spun up over what may happen. It's still just a rumor - maybe a credible one, but a rumor nonetheless. It may or may not happen, and if it does, we won't know for a long time what the impact will be on HGVC.

I agree its too early to get spun up, as everything is just speculation... I don't typically look to the NY Post for business news, but there has not been a public statement or denial from either HGV or Apollo yet.

Of course this may have just been exploration of an idea that got leaked..

I wonder what Hilton's take on the idea is? The HGV resort network is certainly integrated with Hilton, with shared properties like HHV, HWV, The District, Residences, Hilton Club NYC etc. While they don't have veto power, they might be the nudge to get another bid going from someone different.

 

[HGVC Lover]

Some financial analysts are reporting that Blackstone Group would be a probable suitor too.....I would prefer them over DRI....

 

[CalGalTraveler]

How does Diamond get its deal flow and revenue? Are they aligned with a hotel brand which brings them leads? Or are they primarily living off of their existing customers? They may be salivating to get that hotel deal flow and Hilton brand quality as they may have wrung their base dry (alienating many owners in the process who closed their wallets to additional purchases, or are aging out) and have limited ways to grow the topline. If true, limited future revenue streams would impair Apollo's ability to sell DRI at a premium.)

FWIW...It appears that Diamond acquires other TS groups and seems to operate them autonomously e.g. Embarc/Intrawest. If HGVC were to acquire Diamond, one of the first items I would envision would be to pare the portfolios and spin off resorts/collections that are too costly to renovate, don't fit the brand, and/or create a drag on profitability.

I sincerely hope Maui opens on time with the resort as planned and the Diamond rumors are false or rejected by HGV.

 

[hurnik]

Agree. They’ve had a lot of time to raise objections and slow or stop HGVC from proceeding. Now construction is underway, and to get a Court to block work would be difficult given the harm it would cause to the developer at this point. They’d probably have to show some kind of fraud by the developers in the approval process.

It's very easy (IMO) in Hawaii to get things halted if the locals oppose it. Things work a little differently over there.

 

[csodjd]

It's very easy (IMO) in Hawaii to get things halted if the locals oppose it. Things work a little differently over there.

True, I’m sure. But they didn’t get it halted when it was relatively easy. It’s not even clear they opposed it with much vigor. As every day passes, it’s just that much harder — especially now that they are employing more and more construction companies and people in the community.

 

[JIMinNC]

How does Diamond get its deal flow and revenue? Are they aligned with a hotel brand which brings them leads? Or are they primarily living off of their existing customers? They may be salivating to get that hotel deal flow and Hilton brand quality as they may have wrung their base dry (alienating many owners in the process who closed their wallets to additional purchases, or are aging out) and have limited ways to grow the topline. If true, limited future revenue streams would impair Apollo's ability to sell DRI at a premium.)

As far as I know, DRI does not have a linkage with a hotel brand of any kind. Their tour flow likely comes from a number of sources:
1) Existing owners staying in their ownership or using their points/club membership to stay at DRI resorts
2) RCI and II exchangers (many of their resorts are dual-affiliated)
3) Cash rentals of developer inventory and solicitation of those guests for tours
4) Preview packages directed at prospect mailing lists (not hotel-program based) - also using developer inventory
5) Off-Premise contacts - i.e. - the kiosks and activity booths who are paid to solicit timeshare tours in exchange for discounts on vacation activities in resort areas

On the question of DRI being able to leverage the Hilton Hotels/Hilton Honors customer database to solicit for their programs, I would think Hilton Hotels would have veto power over that unless the properties were Hilton-branded. Given the different structures of the DRI program from HGVC, I would think they would likely face the same kind of consolidation issues/conundrum that we've discussed over on the Marriott and Vistana boards about that merger. It won't be easy to create a consolidated program that would allow Hilton branding on DRI-managed properties - even off they were brought up to HGVC standards - unless there was a lot of unsold inventory that could be moved to HGVC and taken out of DRI.

 

[nuwermj]

How does Diamond get its deal flow and revenue? Are they aligned with a hotel brand which brings them leads? Or are they primarily living off of their existing customers? They may be salivating to get that hotel deal flow and Hilton brand quality as they may have wrung their base dry (alienating many owners in the process who closed their wallets to additional purchases, or are aging out) and have limited ways to grow the topline. If true, limited future revenue streams would impair Apollo's ability to sell DRI at a premium.)

FWIW...It appears that Diamond acquires other TS groups and seems to operate them autonomously e.g. Embarc/Intrawest. If HGVC were to acquire Diamond, one of the first items I would envision would be to pare the portfolios and spin off resorts/collections that are too costly to renovate, don't fit the brand, and/or create a drag on profitability.

Between 2010 and 2016 Diamond's strategy was to acquire new customers. They would buy small timeshare systems (recently it was Gold Key in Virginia Beach) and try to get those owners to convert to Diamond points. Also, they structured their points system to encourage incremental purchases of points. Thus, by 2016, 60% of sales were made to existing point owners, 20% to acquired customers, and only 20% to new customers (the new customers were channeled through traditional sources, like II exchangers, renters, and short stay vacation packages). For reference Marriott sales were 60% existing members and 40% new customers, and their target was 50/50.

Wall Street lost confidence in Diamond's strategy and it was one of the reasons the Company was taken private in September 2016. Since then Diamond has set a goal of 40% new customers. But to meet this goal they are offing very big incentives and therefore their marketing costs have skyrocketed. The company's management is saying that once they hook the new customer, then they will make more incremental purchases and the cost of selling will fall. But this is not yet been proven in the financial numbers.

So, yes, Diamond might be attracted by the hotel channel (even Bluegreen uses Choice Hotels as a funnel for new leads). Maybe Diamond will take-on the Hampton Inn niche on the timeshare side and HGVC will focus on the higher end segment of the market. GM sells Chevy's and Caddy's.

 

[CalGalTraveler]

@nuwermj It sounds from your info that Diamond is not in a good place being odd-man out with the hotel chains and accumulating TS systems but using sticks instead of carrots to drive revenue from their base which does not drive repeat loyalty business and advocacy to new buyers. This is coming home to roost and Apollo may be desperate - especially with a recession on the horizon.

Interesting idea on the Hampton Inn niche vs. upscale. This would be a more difficult task than integrating MVC/Vistana/Hyatt who is working with a relatively uniform customer upper income tier.

I question if HGVC has the skill-set to run a cost-constrained mid-tier operation for lower income-tier buyers. IMO it's the lower income buyers that run into the most problems with timeshares because they have less discretionary budget so default more often because they cannot absorb and ride out a negative hit to their budget. Apollo may do better going after HICV or be acquired by Wyndham.

 

[geist1223]

I assume that if DRI buys HGVC it will be maintained as a Collection. DRI has 7 to 9 Collections at this time. Members of a Collection have a 13 month Booking Window in their Home Collection and a 10 month Booking Window in all other Collections. Resell purchasers can only Book into their Home Collection.

 

[nuwermj]

I assume that if DRI buys HGVC it will be maintained as a Collection. DRI has 7 to 9 Collections at this time. Members of a Collection have a 13 month Booking Window in their Home Collection and a 10 month Booking Window in all other Collections. Resell purchasers can only Book into their Home Collection.

My understanding is that HGVC has no trust-fund based points system. Everyone owns deeds at specific resorts. So, if a merger comes to pass and if DRI management remains in charge, HGVC cannot be a DRI collection.

 

[CalGalTraveler]

I assume that if DRI buys HGVC it will be maintained as a Collection. DRI has 7 to 9 Collections at this time. Members of a Collection have a 13 month Booking Window in their Home Collection and a 10 month Booking Window in all other Collections. Resell purchasers can only Book into their Home Collection.

This is a major concern. Keeping it separate would be fine but opening HGVC inventory to the Diamond collections will be a major problem. Everyone will want HGVC inventory and except for a few nuggets such as Embarc, most HGVers will not want to stay at the majority of Diamond properties. With MVC, Vistana and Hyatt, the properties are equivalent quality-wise so overall you are not trading off a lower quality unit for a higher quality one. This is different. How have the Embarc properties fared under this approach?

 

[nuwermj]

How have the Embarc properties fared under this approach?

The nine Embarc locations and their club are completely separate from the Diamond Club. Diamond members can stay at an Embarc location only through an II exchange and vice-a-versa.