Highlights from the FrontFour Capital letter to Diamond Resorts
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FrontFour Capital Group LLC and ADW Capital are significant shareholders of Diamond Resorts International. They've owned since the 2013 IPO.
The issues being that Diamond's shares currently trade at a material discount to both the comparable publicly traded timeshare companies - says fair value of approximately $50 – $55 per share, roughly 11 – 12x forecasted 2016E FCF of$4.72 per share inclusive of the recent Gold Key acquisition.
An even larger multiple should be awarded given Diamond's unique platform and ability to grow through acquisition(s) without channel/hotel banner conflicts that afflict its peers.
Since the Company's IPO, the management team has successfully:
(i) integrated the highly accretive acquisitions of Island One and Pacific Monarch Resorts;
(ii) eliminated the external management structure with Hospitality Management and Consulting Service;
(iii) successfully redeemed the Company's 12.00% Senior Secured Notes and entered into a new credit facility yielding significant interest expense savings and balance sheet flexibility;
(iv) reduced Corporate Debt / EBITDA from 2.8x to 0.6x as of June 30, 2015;
(v) grown LTM EBITDA from $145mm to $336mm through June 30, 2015;
(vi) announced and recently closed the acquisition of Gold Key Resorts at a highly accretive 4x Enterprise Value / EBITDA multiple exclusive of revenue synergies;
(vii) entered into an agreement to develop a 144-room resort in Kona, Hawaii with Och-Ziff Real Estate on an asset-light basis;
(viii) used downtime from recent hurricane to expand its most highly demanded luxury resort in the system – Cabo Azul; and
(ix) announced a $100 million stock repurchase plan in October 2014 and an additional $100 million repurchase plan in July 2015.
Despite these stellar accomplishments, Diamond's shares continue to trade at a material discount to its peer group, which includes Marriott Vacations and Wyndham Worldwide, as well as sell-side analyst price targets of over $40 per share – predicated on numbers we believe to be "light" and do not add in the value of the recent Gold Key deal.
Given the robust demand for exposure to the attractive timeshare industry among institutional investors (e.g., securitization, asset-light development, equity ownership) and Diamond's current over-capitalized balance sheet, the board has a broad array of strategic options to unlock value for shareholders.
FrontFour assumes company will get LBO'd at a price of $40 per share (or approximately 8.0x EV/EBITDA multiple on our 2015 projections pro forma for the Gold Key transaction).