$4.4 billion is a big but not impossible pill for any firm to swallow. Ironically, Hilton Hotels was one of the largest leveraged buy-outs in 2007 by Blackstone at $20.2B. But that's before the hotel buildings were spun off the balance sheet. So they used those assets to secure the loans.
The strange thing about HGVC is that it is primarily a services business - the buildings are mostly owned by the TS owners, so there is not much of an asset base for loan collateral other than inventory on hand. If the new entity defaults on a loan, a lender cannot foreclose the deeds of owners.
Hi CalGalTraveler. I'm not sure I understand your point. Are you suggesting that $4.4 billion is not too large of an amount for MVC or Wyndham?
Also, I didn't mean to suggest that private equity would pay $4.4 billion. They will want to buy at a lower price and sell for a profit at the $4.4 billion valuation. I only meant to say that there is room for bidding between $2.8 billion (today's market capitalization of HGV) and $4.4 billion (today's enterprise value of the company). So something like $3 or $3.4 billion might be the final sales price.
I'm reproducing below a summary I wrote in 2016 about the details of the Apollo DRI leveraged buyout. I can see any private equity firm doing this, but I don't see how MVC or Wyndham Destinations can do it.
"Apollo Global’s acquisition of Diamond Resorts was organized as a
“leveraged buyout”. Here’s how the deal worked:
"Apollo created a shell company called Dakota Parent. Four of Apollo’s investment funds own this company. Dakota Parent created a wholly owned subsidiary called Dakota Sub. Dakota Sub borrowed $2.2 billion dollars (a big chunk of it, $1.1 billion, from the four Apollo funds) and bought 100% of the DRI shares — 72.7 million shares at $30.25 each. Then DRI merged into Dakota Sub, changed the company name to Diamond Resorts International, and thereby took on all Dakota Sub’s debt. This is the way leveraged buyouts typically work.
"Now that all is said and done, DRI is a wholly owned subsidiary of Dakota Parent. The equity in Dakota Parent is owned by the four Apollo funds. Diamond has $2.2 billion debt on which it must make interest payments. The primary lenders are the four Apollo funds. They are in for $1.1 billion, $500,000,000 at 7.75% and $600,000,000 at 10.75%. The secondary lenders are in for $800 million, and another $200 million is secured by some DRI assets (which are consumer loans).
"There are two ways Apollo makes money on this deal assuming all goes well. First, the four Apollo investment funds receive interest income out of DRI’s cash flow. They are guaranteed $103,250,000 per year. High profits or low profits, it doesn’t matter, Apollo gets paid. Further, the Apollo investment funds own a claim to all the equity growth of the company (that is all value over $2.2 billion). Thus, if they can sell the 72.7 million shares for $45 each, not an unreasonable number if all goes well, Apollo’s capital gain will be about $1 billion."