FYI: Diamond Acquisition Financing Article

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Bluegreen: Can Diamond Finance the Acquisition? - Seeking Alpha

Bluegreen: Can Diamond Finance the Acquisition?
by: Notable Calls posted on: August 04, 2008 | about stocks: BXG


Dealreporter is out with an interesting piece on Bluegreen (NYSE:BXG) saying Diamond Resorts may find financing an acquisition of Bluegreen, the Florida timeshare company, challenging, according to bankers following the situation. “This is a tough thing to finance,” said an industry banker, adding that his bank would not lend towards a possible deal between the two parties. It is the wrong time to finance a timeshare transaction, commented a second banker who was familiar with the companies involved and had previously been involved in lending for transactions in the industry.

On 21 July, Diamond Resorts signed a non-binding letter of intent [LOI] relating to the acquisition of Bluegreen for USD 15 a share, or approximately USD 500m. The agreement allows for Diamond Resorts to conduct “extensive” diligence until 15 September. In its 18 July letter to Bluegreen, Diamond Resorts said it was “confident that it will be able to raise the financing necessary to consummate the proposed transaction.”

A source close to the situation said Bluegreen had taken reasonable steps to satisfy itself “to some extent” that Diamond Resorts could finance the transaction. The source said Bluegreen had been given some insight into Diamond’s financing plans, but would not go into detail. The source acknowledged that financing market conditions were uncertain at present and decisions on both sides of the table could change during the due diligence process.

Yet, a third banker said the timeshare industry has been a steady performer in tough economic times as people have been unwilling to let go of the equity in their timeshare investments. However, he pointed out vacation ownership and residential sales at Starwood Hotels & Resorts Worldwide (HOT), one of Bluegreen’s major competitors, had dropped 28.4% in 2Q08 when compared to the same period in 2007.

The first banker speculated that because a LOI was signed rather than a definitive agreement, financing was probably the biggest question mark surrounding the deal. “I think that they are struggling on financing,” the banker said. Bluegreen is actually taking on the financing risk by allowing Diamond Resorts access to its books with no breakup fee, this banker said. Diamond Resorts had been given access to conduct diligence because it was a highly motivated buyer, and because of the attractive price being offered, the source close to the situation said.

Notablecalls: I think BXG should move towards the $8-9 level on this tidbit. BXG was a $6.5 stock when the "deal" was announced.

I expect the media to pick up on this one by tomorrow morning as they did with AKS (the next day after Dealreporter broke the story to subscribers).

Disclosure: Author has no position in BXG

[vintner Super Moderator Find all posts View Profile Close vintner]

Story was interesting in a couple points that the author noted:
The Letter of Intent rather than a purchase agreement gives both parties a chance to review information and hopefully come up with a transition plan and the financing to make it happen.

With no break up fees, if this doesn't happen, Bluegreen has lost time and money in their expansion, partnership or outright sale of the company. Not the way it is usually handled, so maybe BG is confident this will happen.

[BocaBum99 Super Moderator Find all posts View Profile Close BocaBum99]

My view is the same as the financial analysts. It's hard to imagine which investor group is going to provide financing for a $500M buyout of a public company to a private company when the premium for that company is about 150% over the market price in a company that has a significant presence in residential real estate.

That said, you can't count out a CEO like Stephen Cloobeck. If he says he can get the money, he probably can. We will know shortly.

Regarding the press release, it is very unusual for any company to announce a non-binding letter of intent. However, there are several reasons why they might want to do it at the time they did.

1) Since they announced it ahead of earnings, I was wondering if Bluegreen was preparing for reporting bad results. I listened to the earnings call and it wasn't that bad at all. So, it wasn't to mask poor performance. But, then again, maybe they expect bad results later in the year and this is setting the table for future announcements.

2) I did see three things in their financials that concerned me about the company. They could have made the announcement simply to announce their intention of finding a strategic acquirer. In other words, to let the industry know that they are for sale without it looking like they are desperate.
a) dramatic year over year decline in residential real estate. That part we pretty much knew about given the housing slump. It's probably the key contributor to the collapse in the stock price over the past year.
b) sales and marketing costs are through the roof. Sales and Marketing is 67% of sales. 50% is already a heft number to spend on cost of sales. When you get to 67%, you need to rethink your marketing plans.
c) Bluegreen is selling 44% of product to existing owners. That means the newbies are getting harder and harder to find. All that money they spent on marketing didn't work. They still sold primarily to existing owners.

If Stephen Cloobeck gets financing for this deal, he will probably convince the investors that through the powerful marketing he has created for Diamond Resorts, he can reduce the cost of sales and marketing of Bluegreen to 50% from 67%. That would pretty much pay for the debt servicing.

That's probably the argument I would make. Then, all of the other efficiencies gained will be synergies for both companies.

Simple argument. Tough to execute. That's why CEOs make the big bucks.

Jim