Sunterra – Is there Light at the End of the Tunnel?

The big conversation piece at this years ARDA convention which took place in Orlando, March 25-29 was the acquisition of Sunterra by Diamond resorts which was announced on March 12, 2007. The industry remains strong, but can Sunterra succeed with its new leadership in an intensely competitive field.

Few pure timeshare companies will remain once Sunterra goes private. Many analysts benchmarked Sunterra’s financial data to help evaluate other timeshare operators. The only public timeshare players left in the industry are: Bluegreen (BXG) 80% timeshare, 20% land sales and two small niche operators, Silverleaf (SVLF) and ILX Resorts, Inc. (ILX). They are not large enough to provide meaningful trend line information.

From a public information standpoint we can only rely on the minimal disclosure from the major hotel brands and vacation exchange companies. On an annual basis PricewaterhouseCoopers provides an excellent timeshare financial benchmark study.
Can Cloobeck who has had somewhat of a litigious past (I’m sure he justified these legal actions for this deal) and essentially ran a family owned timeshare operation rise to the challenge in rebuilding Sunterra? An interesting fact is that Cloobeck apparently has an $8 million buyout clause if his leadership is no longer warranted.

-Who will Cloobeck, bring in to his new senior management team (there was some wrong words in mine)

-What are his intentions in keeping Sunterra Europe?

-Is there something going on behind the scenes that we are not being told such as an eventual breakup strategy?

Thousands of high quality Sunterra employees are hoping for a good new home (as a former Sunterra executive I wish them the best). Layoffs should be minimal as the Diamond acquisition does not involve a consolidation strategy.

Many in the resort and timeshare industry are still amazed as to how Stephen Cloobeck, essentially the developer of a relatively small, but successful two resort network (the Jockey Club and Polo Towers in Las Vegas) was able to acquire one of the largest timeshare operations in the world.

The $700 million purchase price includes $325 million for the company and the assumption of $375 million in Sunterra debt. The deal, which has Sunterra’s board’s approval, awaits a shareholder vote. If ratified, Diamond Resorts expects the sale to close this spring.

Diamond’s CEO, Stephen Cloobeck, plans to keep Sunterra Europe, which Sunterra had considered spinning off. He plans to lead the combined company as Chairman and CEO. It will be privately held, and headquarters will remain in Las Vegas.

The tender Offer is scheduled to expire at 5:00 p.m. ET on April 25, 2007, unless extended. If following the Offer Diamond owns at least 90% of Sunterra's outstanding shares, the Diamond Resorts affiliate will merge with and into Sunterra, with any shares not tendered in the Offer being converted into the right to receive $16.00 per share in cash.

Other aspects of the deal include the following:

-Merrill Lynch was the firm hired to seek and review strategic offers for the sale of Sunterra to potential bidders

-Diamond resorts collateralized Polo Towers as part of their equity capital requirements to help fund their equity requirements of the deal in addition to cash; Polo used its unsold inventory that was valued as part of the deal

-Soros Strategic Partners was another huge equity provider putting in over $100 million for preferred equity plus $62.5 million cash collateral for the deal

-Credit Suisse is the primary bank for the $325 million in debt financing and has provided a definitive financing commitment to Diamond Resorts

-Sunterra’s management in their recent conference call mentioned that there were at least two other bidders in additional to Diamond, plus an interested party for Sunterra Europe only

The timeshare industry remains substantial with close to $9 billion in sales in the U.S. and steady growth, 9% in 2005 (the last year of recorded information). Sunterra can offer a significant price/value product. However, it may have lost some energy in this transaction period and will continue to have lots of competition from leading hotel brands throughout the U.S. such as Marriott, Hilton, Wyndham, Disney, and Starwood, plus depending on the market other major local and regional players.

Are we missing something here - $700 million, huge Wall Street players seemingly with money to spare. Do they know something that we don’t? One thing is certain, George Soros has more money than I do.