What's Behind This Bid?

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On Nov. 15, BFC Financial increased its offer for Bluegreen (UNKNOWN: BXG.DL) to $10 per share in cash, or roughly $316 million.  The new price is a substantial increase from BFC's initial buyout price that was announced in November 2011, which offered 8 shares of BFC for each share of Bluegreen, or roughly $144 million. 

The completion of the merger has been delayed by a deal requirement that BFC’s stock must be listed on a national securities exchange rather than on the OTC market.  BFC has been unable to fulfill this requirement to date due to the ongoing SEC inquiries into the business dealings of Alan Levan, the chairman of both BFC Financial and Bluegreen.  In addition, Bluegreen stockholders have been unhappy with the merger price and the lack of an auction for the company.  However, given BFC’s 54% stake in Bluegreen, they are the only logical buyer of the company.

What’s the Value?

Bluegreen competes in the timeshare industry, offering vacation ownership interests in 59 owned or managed properties located in 11 U.S. states, and on the island of Aruba.  The timeshare industry was initially developed in the 1960’s to provide customers with a cheaper, more flexible alternative to traditional hotel accommodations.  According to the American Resort Development Association, the industry’s trade group, there were 1,548 resorts operating in the U.S. in 2011. 

Bluegreen offers its customers the Bluegreen Vacation Club, a points-based, deeded vacation ownership plan that provides purchasers with an annual allotment of points, representing ownership and beneficial use rights in perpetuity.  Buyers can use their points at any Bluegreen affiliated resort, or can exchange their points with owners at 4,000 other resorts worldwide through the RCI network. 

After growth in the 1990’s and early part of this century,  the industry was severely impacted by the financial crisis of 2008, due to its customers’ declining discretionary income and its own inability to finance construction and sales of properties.  Consequently, the industry is now dominated by the large, multi-national hospitality companies, including Marriott International, Starwood Hotels, and Wyndham Worldwide.

The New Bluegreen

Bluegreen has been adapting to the new business environment by selling off existing inventory and becoming a service organization to owners of resorts.  Over the four year period that ended in December 2011, total sales of the company’s properties and the number of annual completed transactions declined by 63.5% and 61.0%, respectively.  Meanwhile, sales of properties owned by third parties and the number of annual completed transactions rose from zero to $109.7 million and 8,927, respectively, over the same time period. 

The reduced capital requirements and risks of owning properties has led to a boost in the company’s financial results.  Total revenues and operating income in FY 2011 were $403.4 million and $56.7 million, increases of 15.2% and 328%, respectively, over the prior year.  Bluegreen benefited from stable pricing, reduced customer defaults, and higher margins in their third party marketing division.  In 2012, the company's asset-light strategy has continued to pay off financially.  During the third quarter of 2012, total revenues and operating income were $126.0 million and $11.7 million, increases of 12.8% and 65.4%, respectively, over the prior year.  Bluegreen’s rising profitability has led to more stable operating cash flows and an improvement in the company’s financial position.

The Next Opportunity

Since BFC is taking Bluegreen private, where should an investor look for opportunities?  Given the industry’s volatility, investors should focus on the well-run, global hospitality companies that have large timeshare businesses and geographic diversity in their portfolios.  The company with the best position in the market is Wyndham Worldwide (NYSE: WYN).  The company continues to deliver for investors in the first nine months of 2012, with revenues and adjusted EBITDA of $3.4 billion and $836 million, increases of 5.8% and 6.5%, respectively, over the prior year period.  Wyndham benefited from higher lodging revenues and sales of vacation ownership interests, while sales of vacation rentals were lower.  In 2013, the company expects continued growth in its markets, with adjusted EPS of $3.50 to $3.60, a 14 P/E multiple on its recent stock price. 

Alternatively, investors wanting direct exposure to the timeshare industry should look at Interval Leisure Group (NASDAQ: IILG), which offers membership and vacation exchange programs worldwide.  As of December 2011, the company had roughly 1.9 million customers and a network of 2,600 resorts in 75 countries.  Through the first nine months of 2012, the company reported revenues and operating income of $362.6 million and $83.6 million, increases of 10.1% and 6.8%, respectively, over the prior year period.  While its sales in its rental segment rose due to an acquisition, membership levels were flat versus the prior year period and margins have been pressured by declines in revenue per member and rising taxes in European markets.  However, the company expects future growth in membership levels and the consensus analyst estimates are for EPS of $1.26 in FY 2013, giving the company a reasonable 15 P/E multiple on its recent stock price.  Investors should keep both of these rising stars on their radar screens.

rghanley owns shares of Bluegreen. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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