As a vote of confidence in the recovery of leisure travel, Hilton Grand Vacations (NYSE: HGV) has made a deal to acquire Diamond Resorts International from Apollo Global Management (NYSE: APO) in a $1.4 billion stock deal. This transaction will add 92 leisure resorts to Hilton Grand Vacations' portfolio, and expand them into 20 new markets.
HGV's portfolio currently consists of 62 luxury resorts with over 350,000 owners. After the acquisition, the portfolio will include 152 resorts with roughly 731,000 owners.
What Hilton Grand Vacations will look like after the deal
What's more significant than HGV more than doubling its number of resorts is that they're diversifying into a broader price range and expanding to drive-to destinations. HGV has focused on high-end vacation properties in the most popular destinations like Hawaii, Orlando, and Cancun. Diamond Resorts, on the other hand, has a focus on regional destinations with resorts in 34 states plus their Caribbean and international locations.
By adding these 92 resorts and roughly 400,000 owners to their portfolio, the majority of HGV's business will be shifted to accommodate a new class of traveler. The cost of ownership for a week with Diamond Resorts is less than half the cost with Hilton Grand Vacations, with the list price for a week being approximately $25,000, compared to roughly $60,000, respectively. By adding these lower price point properties, Hilton will be able to add new price levels to their ownership offerings.
The fact that Hilton Garden Vacations is making such a substantial investment to enter this market segment provides a good indication of where the company sees the hospitality industry heading in the near future. It's important for hospitality investors to recognize the changing demographics of travelers. While baby boomers and Generation X made up the majority of travelers for the past several decades, millennials and Generation Z are becoming an increasingly larger part of the travel market.
Of course, it's not all just about a more diversified portfolio of resorts. This deal makes a lot of financial sense to HGV as well. Diamond Resorts had an adjusted EBITDA of $305 million in 2019, plus, combining the companies will save HGV roughly $125 million annually from cost synergies.
HGV will be funding the deal by issuing 34.5 million shares of common stock, valued at roughly $1.4 billion, plus assuming $657 million of securitized debt from Diamond Resorts. Considering that the company currently has 84 million shares outstanding with a market cap of $3 billion, investors should see a nice boost in valuation over the next two years from the anticipated 95% increase in EBITDA.
As the hospitality industry is beginning to recover, and companies can start looking to the future instead of putting all their focus on survival, I believe we will see a lot more consolidation like this with other travel and hospitality companies. Investors should play close attention to who is in a financial position to make opportunistic acquisitions as well as who has a portfolio well-suited to accommodate the changing trends in travel. I think we'll be seeing more deal announcements like this one in the coming months.