Why Marriott Vacations Is Paying Billions for ILG

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Marriott Vacations Worldwide Corp. (NYSE: VAC) announced Monday morning that it is acquiring ILG Inc. (NASDAQ: ILG) in a cash-and-stock deal valued at $4.7 billion. ILG shareholders will receive $14.75 in cash and 0.165 shares of Marriott Vacations stock for each share of ILG stock they own.

The combined company will own more than 100 vacation properties around the world with about 650,000 owners and more than 20,000 vacation units around the world. The combined company also will own seven “upper-upscale and luxury brands.”

The deal is expected to close in the second half of this year, subject to regulatory and shareholder approval. Once the transaction is completed, ILG shareholders will own approximately 43% of the combined company.

In addition to adding luxury brands to its stable, Marriott Vacations CEO Stephen Weisz noted other benefits to the deal:

This transaction will combine two of the premier global vacation ownership companies to create a more diversified company with significantly enhanced marketing potential and scale to drive sales growth and value for both MVW and ILG shareholders.

The deal appears to be primarily about scale and places a bet on the combined company’s ability to attract more upscale visitors. Where timeshare arrangements were once very popular, temporary rentals such as those available through vacation rental websites like Airbnb and Homeaway have become far more popular among both millennials and less upscale boomers.

If, as this deal seems to indicate, the vacation timeshare business is heading uptown then the indicated course of action is to buy more of uptown properties. The question then becomes one of reduced costs. Marriott Vacations said it expects the deal to be accretive to earnings per share within the first year after close and further expects the transaction to result in run-rate savings of at least $75 million within two years of closing. That doesn’t seem like much when pro forma operating costs for 2017 totaled around $2 billion. The company also said it plans to continue paying its $1.60 annual dividend (yield of around 1.2%).

ILG stock traded up more than 6% early Monday, at $34.66 in a 52-week range of $23.59 to $35.00. The high was set earlier this morning and the stock closed at $32.65 on Friday.

Marriott Vacations traded down about 7.6% to $124.19, in a 52-week range of $107.58 to $154.14. The 12-month consensus price target is $156.33.

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