|Shares Out. (in M):||74||P/E||0||0|
|Market Cap (in $M):||679||P/FCF||0||0|
|Net Debt (in $M):||-98||EBIT||0||0|
Buy BXG equity. Even as I risk being ridiculed for being in bed with an Alan Levan company, I am recommending buying BXG equity. This stub equity trades at a modest 4.8x next year’s EBITDA and a mid-teens FCF yield (ex-cash) largely because its has become orphaned following a failed go-private transaction. Recent earnings related weakness in the trading of its publicly traded comps and the growing concerns about a potential recession around the corner likely has also weighed on the share price. While the valuation and the potential catalysts are very compelling, given the cyclical nature of this industry, I’ve paired the position with some puts on IWM in the event we are heading into a slowdown.
BXG is a vacation timeshare company that is 90% owned by BBX Capital, a publicly traded holding company controlled by Levan and his cronies, err sorry, friends/family. I believe Levan showed his cards in March when he tried to take BXG private (again) by merging it (back) with BBX Capital. He was subsequently forced to pull the offer in May when a major BXG partner relationship issue with Bass Pro came up which resulted in over a 50% decline in the stock price. The stock initially recovered some from the June lows on news of the resolution of the issues but has since retraced back near the 52-week lows. I believe that there’s a high likelihood that BBX will come back with a new go-private offer within the next 12 months and the risk/reward is favorable here.
What kind of upside are we talking about? Obviously, I don’t know what BBX will do but we can take a shot at some possible outcomes. BXG came public in November 2017 at $14.00/sh and subsequently traded as high as $25.00/sh by mid 2018. I suspect some of this exuberance had to do with the small float and perhaps even some short covering by folks who had a BBX/BXG long/short pair trade. However, weaker than expected operating performance derated the stock price back to the low teens by the end of 2018. BBX’s opportunistic March offer of $16.00/sh represented a ~20% premium to the share price at the time. With the stock now trading at $9.12, I think it’s safe to assume that any potential new offer will be below $16.00. At a minimum, I think another ~20% premium offer is achievable for no other reason than Levan is predictable. This works out to a purchase price of ~$11.00/sh based on current trading levels. But would he actually make an offer that far below the IPO price or even the March offer price? While Levan’s penchant for screwing shareholders is legendary, I think it would be quite silly (for even him) to make an offer much below the $14.00/sh IPO price. The optics would be bad and it would be penny wise and pound foolish – every $1.00/sh improvement in the offer would cost BBX less than $7.5mm, a rather insignificant amount if the intent is to avoid a long, and potentially litigious, valuation fight with disgruntled investors. For that reason, my base case is that he initially offers $12.50/sh, which represents ~37% upside from today’s levels, but then bumps it up to $14.00/sh (~54% upside) after some investors object. While a low probability event, upside case would be an offer of $15.00/sh, representing ~65% upside from here. With a dividend yield of ~7.5%, you’d also get paid to wait around for this offer, should it ever come.
Takeover game theory dynamics aside, the risk/reward is attractive because at 4.8x EBITDA, I don’t believe BXG has a buyout premium already factored into the stock price. For the time being, let’s put aside the fact that while BXG will be under earning for the next four to six quarters, it will be poised for higher profitability beyond then. While the whole timeshare industry currently trades at below market multiples, it would be difficult to make the argument that BXG’s current valuation is excessive. Based on where the comps are trading, I believe BXG is undervalued and conservatively worth $11.00 – 12.00/sh today, which suggests that you’re getting the buyout catalyst for free. With M&A comps north of 7.0x EBITDA, BXG would be worth at least $13.00 – 14.00/sh to a potential buyer but likely even more to parent BBX because they absolutely need this asset and it wouldn’t cost them a whole lot to pay up for the stub.
BXG is a non-branded timeshare resort company, with a portfolio of 69 resort properties across the US and the Caribbean, concentrated in the Southeastern US. BXG’s publicly traded peers, Wyndham Destinations, Marriott Vacations and Hilton Grand Vacations, are affiliated with major hotel brands and offer a branded timeshare product. BXG has a partnership with Choice Hotels, but the timeshare offering is not branded, and the emphasis is on an experiential vacation product. The non-branded timeshare segment is fragmented and BXG is a leader in this category.
BXG first went public in 1985 as a land bank and entered the timeshare business in 1994. A few years later, the Company shifted from a weeks-based system to a points-based system. In the past, BXG was a capital-intensive business that developed its inventory or acquired and held the inventory prior to sale. In 2009, forced by the financial crisis when timeshare sales crashed, BXG began a shift to an asset-light model, with greater use of third-party developers, secondary market, and just-in-time inventory.
Through its Bluegreen Vacation Club, a points-based system, the ~217,000 owners in the Vacation Club have the flexibility to stay at units available at any of the 69 resorts and have access to approximately 11,300 other hotels and resorts through partnerships and exchange networks. Most of BXG’s resorts are located in popular, high-volume, “drive-to” vacation destinations, including Orlando, Las Vegas, Myrtle Beach, Charleston and New Orleans where 85% of owners live within a four-hour drive of at least one property in the system.