BBX Capital: Bluegreen Vacations IPO

BBX Capital (BBX) is familiar to many investors who fish in the same small cap value and special situation ponds.  Most of the company's (and predecessor BFC Financial) colorful management team and history has been hashed out other places, the company fell off my radar until they recently announced the listing of their timeshare company, Bluegreen Vacations (BXG).  At the mid-point of the indicated range, BBX's remaining 90% stake in Bluegreen would be worth considerably more than BBX's market cap resulting in the remaining assets being valued below zero.  There are a few moving parts here and I know some readers know this company far better than me, but hopefully I got the numbers directionally right.

Bluegreen Vacations Corp (BXG)
The timeshare business is hot again -- Wyndham (WYN) is spinning off their exchange and timeshare business, ILG and Marriott Vacations Worldwide (VAC) are reportedly in talks to merge and Hilton Grand Vacations (HGV) is up ~60% since it was spunoff in January.  Sensing an ideal market for a new issuance, BBX Capital is floating up to 10% of Bluegreen in an IPO scheduled for this week.

Bluegreen Vacations is a typical timeshare business, they have a mix of VOI ("vacation ownership interests") sales from their own developed properties but have moved toward a capital light model where they sell VOIs for third parties for a fee.  Once a timeshare is sold, Bluegreen then provides financing for up to 90% of the cost of the timeshare for a mid-teens interest rate that fully amortizes over 10 years.  Once the timeshares are sold and financed, Bluegreen then manages the timeshare resorts for a fee in a cost-plus model under a long term contract.

The difference between Bluegreen and their peers is in the end consumer they serve.  Bluegreen is primarily focused on "drive-to" destinations and a more value focused/lower end demographic, think more Myrtle Beach and Panama City, less Hawaii and Aspen (although they do have resorts in both locations).  Their average customers income is around $75,000 versus $90,000 for the timeshare market as a whole, certainly below average, but still solidly a middle class demographic and the average timeshare is ~$13k verus $20+k for the other publicly traded companies.  Prior to 2008, Bluegreen didn't utilize FICO scores in making credit decisions on their timeshare loans, basically anyone was given financing, now they have 41% of sales paid in cash within 30 days and those that do finance, have on average FICO scores of 700.  And remember, timeshare lending is a pretty great business, if someone defaults, Bluegreen will generally cancel their timeshare after 120 days delinquent and simply return the points to their inventory to be sold to someone new.   Nearly a friction-less foreclosure process. To reach their target consumer, Bluegreen has partnered with Choice Hotels and Bass Pro Shops (they have displays/reps in stores), as well as promoting their product through kiosks at outlet malls that are often located near drive-to resort towns.  In total, they now have 211k timeshare owners and manage 67 resorts.

The IPO has an offering price range of $16-18/share, there will be a total of 7,473,445 shares (including the underwriter's option) offered, half new shares from Bluegreen and half coming from BBX Capital as the selling shareholder.  After the IPO, public shareholders will own 10% of the company and BBX Capital will own the remaining 90% of shares.  To skip straight to the main thesis: BBX will own 67,261,010 shares of BXG, at the IPO mid-point of $17, that's an implied value of $1.14B for their remaining stake, plus the $63.5MM in cash received from selling their shares via the IPO, that's significantly more than BBX's current market cap of $871MM.

Back to Bluegreen itself, what's the valuation look like at the mid-point of $17/share?  Bluegreen has done $148.8MM in EBITDA over the 9/30 TTM (subtracting interest expense on VOI securitizations), will have cash of $181.6MM after the IPO and $237.7MM of recourse debt.  At the $17/share mid-point, I then have the enterprise value at $1,326MM for a 8.9x EV/EBITDA multiple.  There's probably a bit of apples and oranges going on with the consensus EBITDA multiples on Bloomberg, but timeshare peers (VAC, HGV, ILG) all trade for 10.5-12x EBITDA, so while almost 9x does seem expensive on its own, Bluegreen is relatively cheap compared to peers.  It really is an opportunistic time to IPO it again, getting a good historical multiple while still appearing cheap against comparables.

Rest of BBX Capital
BBX Capital outside of Bluegreen has $140.4MM of cash as of 9/30, following the IPO of Bluegreen,they'll have about $181.3MM in cash with $42.2MM of non-Bluegreen debt.  So again, just the value of net cash and Bluegreen shares is worth about $12.47 per BBX share and the stock trades at $8.50 today.

Additional Assets at BBX Capital:

• BBX Capital Real Estate: Mostly as a result of the failed BankAtlantic predecessor, BBX has a grab bag of real estate that they foreclosed on and are still in the process of redeveloping for future sales.  The real estate is marked at $180MM on the balance sheet as of 12/31/16, but like other similar financial crisis real estate plays, they marked the assets down at rock bottom prices, much of which has recovered since.  Hard to place a value on these assets, but it's likely significantly higher than $180MM.
• BBX Sweet Holdings: Collection of candy companies, the largest of which is IT'SUGAR, purchased for $58.4MM back in July, it has 96 retail stores in 26 states and DC.
• Renin Holdings: Manufactures interior closet doors, wall decor, hardware and other products for the home improvement industry, its tiny, generating $900k in pre-tax income in 2016.

The well documented reason for much of the undervaluation is BBX's Chairman and CEO Alan Levan.  Levan has had an on-again, off-again battle with the SEC over rosy comments he made in 2007 while running BankAtlantic and then being slow to mark down clearly impaired assets as the financial crisis unfolded.  Levan and his Vice Chairman control 76% of the voting power, and as seen in their merchant banking activities, fancy themselves as savvy middle market investors.  The market tends to discount these controlled mini-conglomerates for good reason, but with the IPO of Bluegreen looming (possibly pricing tomorrow, 11/16), some of the discount should dissipate further.

Disclosure:  I own shares of BBX.  I also have exposure to a tiny piece of HGV through my pre-spin HLT call options that expire in January.