Real Estate

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Diamond Resorts has seen the light.

The $1.7 billion manager of timeshares in locations worldwide gained roughly 20 percent Thursday, its biggest single-day move since the company's 2013 IPO, as investors cheered a decision by the board to explore strategic alternatives with the help of advisory firm Centerview Partners. 

The move comes roughly four months after two shareholders sent a joint letter to Diamond Resorts' CEO requesting that the company consider all its options, including a sale. They argued that the company was undervalued compared to rivals such as Marriott Vacations Worldwide and Wyndham Worldwide, in part because of outsized short interest.

More than 23 percent of the company's free float is held short, according to data compiled by Markit, compared to 5.6 percent and 7.7 percent for Marriott Vacations and Wyndham Worldwide, respectively. This could be due to the perception that it has more aggressive sales practices, which were detailed in a New York Times article that pushed the stock 17.3 percent lower last month. 

Unappreciated?
Diamond Resorts has used accretive acquisitions to drive earnings growth.
Source: Bloomberg

Diamond Resorts also may have been spurred into action by industry consolidation, as exemplified by Starwood Hotels & Resorts' pending sale of its timeshare arm to Interval Leisure Group. The deal values the unit, known as Vistana Signature Experience, at roughly $1.5 billion, or 12 times its adjusted trailing 12-month Ebitda. 

That's a steep premium to Diamond Resorts' own trailing EV/Ebitda multiple of 9.5. Its forward EV/Ebitda multiple of 6.2 lands it in bargain territory for potential suitors, which include private equity firms as well as Marriott Vacations and Wyndham Worldwide. Both could pay more than $30 a share and still have a deal be accretive to 2016 earnings per share even without factoring in synergies, if a bid is at least partly funded with cash, according to data compiled by Bloomberg.

Decent Value
Diamond Resorts may be cheap enough to attract suitors.
Source: Bloomberg

Of the two, Wyndham seems less likely to pounce. Its CEO Stephen Holmes said on an earnings call this month that future acquisitions may be skewed toward the rental and hotel segments, rather than timeshare. 

For management, selling to a private equity firm may be a favored option. Diamond Resorts' founder, chief executive and vice chairman own roughly a quarter of the company, according to data compiled by Bloomberg, and may want to keep some skin in the game. 

There's also a sizable consolation prize for any bidders that miss out on this deal: Hilton Worldwide has previously suggested it's evaluating a separation of its slightly larger timeshare business. 

The timing's right for Diamond Resorts to put out feelers. Now all it needs is someone to take the bait. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net