The wild ride that shareholders of Diamond Resorts International (NYSE: DRII) have been on in the past year may soon be coming to an end. On June 29, the vacation time-share company entered an agreement to sell itself to private equity firm Apollo Global Management (NYSE:APO). What does the deal mean for investors, and what lies ahead?
The skinny on the deal
Apollo has agreed to offer shareholders of Diamond Resorts $2.2 billion, or $30.25 per share. Since the announcement, shares have jumped from their closing price on June 28 to match the 26% buyout premium and currently trade in the $30 range. The deal hinges on the condition that more than half of Diamond's common shareholders agree to the offer and that the usual regulatory approvals go through. Diamond's board of directors is recommending shareholders take the deal, which, if accepted, should be completed over the next few months.
The acquisition shouldn't come as a surprise. Back in February, Diamond Resorts management announced it had formed a special committee to "explore strategic alternatives to maximize shareholder value". The reason? The company stated that despite 10 straight reported quarters of business growth and guidance, and even though it said 2016 would be a record year, the stock performance has been disconnected from those results.
For investors who bought in during the initial public offering in 2013, the offer represents a 116% gain.
What investors should do
It's time to jump ship and sell your shares if you're sitting on a profit. With the double-digit overnight gains and limited upside going forward, there's little reason to continue holding on to shares.
Two reasons you might continue holding the stock is to take part in the tender offer with Apollo or to see if a higher offer comes in from another party. However, the Apollo tender offer price of $30.25 in cash per share is about what the stock is trading for at the time of this writing.
To the second point, a few law firms have recently announced that they'll be investigating Diamond's board of directors for failing to shop for a more favorable bid. Some of the firms note that Diamond Resorts' stock price touched $32.49 in the past year, and some Wall Street analysts have a price target as high as $35 per share on the company. It's important to note, however, that these announcements only refer to an investigation and not any legal findings or results.
What investors shouldn't do
Owners of Diamond Resorts stock who want to wait until the offer from Apollo should accept it when it's received. Rejecting the offer if the deal goes through would be disastrous, as liquidity for the shares will only decrease, making it more and more difficult to sell your position.
If you do sell your Diamond shares or accept Apollo's offer, you'll probably be looking for somewhere to reinvest your cash. If you want another vacation company peer, bear in mind that buying Apollo stock is not the replacement you want. The company's private equity funds will be the holders of the Diamond Resorts assets, not Apollo Global Management directly. Purchasing the publicly traded Apollo stock won't give an investor exposure to the Diamond Resorts business.
As a travel-related replacement for your Diamond Resorts shares, take a look at online travel companies Priceline Group and Expedia instead.