Luxury travel club going public

FORT COLLINS – After almost two years of struggling through a merger and an emergency capital infusion, Ultimate Escapes Holdings LLC is on the verge of taking the high-end resort club public.

Ultimate Escapes – the luxury travel destination firm created from Orlando, Fla.-based Ultimate Resorts and Fort Collins’ Private Escapes – is the acquisition target of Secure America Acquisition Corp., a special-purpose acquisition company. The SPAC launched its $80 million initial public offering in 2007 with the sole purpose of finding a business to invest in. If a transaction is not consummated by Oct. 29, Secure America’s trust fund will be liquidated.

The deal for Ultimate Escapes, which will include a $20 million cash contribution as well as $57 million in Secure America stock, is expected to close by the end of October.

The pending deal caps two years of turmoil for Private Escapes and Ultimate Resorts. A letter of intent to merge was executed in September 2007, but hit a roadblock when it came to merging the firms’ finances. Richard Keith, chairman of Ultimate Escapes who founded Private Escapes, explained that a new credit facility was required, and as with many things, timing turned out to be everything.

“The world changed course in 2008,” Keith said. “Our lender got a little skittish and began to backpedal a little bit.”

Ultimate Resorts and Private Escapes instead entered into a joint-venture agreement. For members of the companies, it was as if the merger had been completed.

Survival rather than growth

As with many companies, the past two years became about survival rather than growth.

For 2008, both Private Escapes and Ultimate Resorts operated at a loss – $14.2 million and $23.2 million, respectively. The firms were able to shed $18 million per year in operating costs through several rounds of layoffs and cost cutting. In the Fort Collins office, employment fell from about 50 to around 20, and parts of the 14,000-square-foot building at 145 Mountain Ave. are available for subleasing.

In September, the firms finalized a $110 million credit facility with CapitalSource, forming Ultimate Escapes Holdings LLC. The merger of Ultimate Resorts and Private Escapes would have occurred with or without Secure America, but the pending deal would not have gone forward without the merger, according to Keith.

“There are a lot of hurdles in this process,” he said.

In order to close the acquisition, Secure America’s shareholders must approve:

• a warrant amendment proposal;
• a pre-acquisition charter amendment;
• the acquisition proposal;
• a post-acquisition charter amendment proposal.

Secure America was formed to invest specifically in the homeland security industry. According to its U.S. Security and Exchange Commission filings, the company “considered and analyzed numerous companies and acquisition opportunities in the homeland security industry … but did not believe that any of those candidates would be as attractive to public stockholders as the proposed acquisition.”

Deadline pressure normal

With the October deadline looming, it would seem that Secure America is under pressure. However, it is the norm for SPAC deals to push their deadlines.

“It behooves you to wait until the deadline,´ said Michael Tew of independent research firm SPAC Research Partners, based in New York.

He explained that an SPAC management team takes all the time allotted to review as many deals as possible.

SPACs, also known as blank-check companies, have been around for decades, but really became mainstream in 2006 and 2007, when Secure America was formed. Tew explained that investment banks became involved in the market, underwriting deals worth hundreds of millions of dollars. One of the largest SPACs to date is Liberty International, raising $878 million with its initial offering on the NYSE Euronext exchange.

Tew anticipates there will be an SPAC hiatus during 2010 while the market evaluates value and best practices. One major change will be to the founder’s shares provisions. Now, the management team charged with completing the deal can get up to 20 percent of the shares.

“That’s very rich, by any standards,” Tew said.

Such provisions are proving to be very dilutive, especially for deals to purchase companies that aren’t in hyper-growth mode, and management teams are already making concessions.

Before the 2006-07 boom, SPAC deals were a more modest $40 million to $70 million – a size that really presents a better value.

“We’ll definitely go back to that framework,” Tew said.

With proceeds of $79.2 million, after fees, Secure America pushes the high edge of Tew’s range.

Industry under siege

The deal will not affect the resort members for Ultimate Escapes in any substantial way, Keith said. In fact, they will now enjoy the transparency of operations required by publicly traded companies. The new capital will also provide a greater sense of security in an industry that’s been under siege.

“Most of our competition is gone,” Keith said.

Several luxury resort companies have filed bankruptcy during the last year. Denver’s High Country Club filed Chapter 7 bankruptcy in January, following an earlier attempt to restructure without assistance from the courts. Salt Lake City-based Soltice filed for bankruptcy in March, leaving about four firms in the business, down from about a dozen.

“(The economy) has reshaped the industry,” Keith said.

But there are signs that the model is still an attractive one. Hospitality industry giant Ritz-Carlton launched its Ritz-Carlton Destination Club earlier this year.

Ultimate Escapes appears to have come out well positioned, but it wasn’t unscathed by the downturn. The economy took its toll on new memberships; the initial fee to join ranges from $70,000 to $450,000, with additional annual dues.

The squeeze on revenue led to a need to not only cut costs, but also raise capital. Keith explained that because of the condition of the real estate market, the firms were unable to effectively liquidate any of its $117 million in assets. Luxury real estate deals have been solicited for 50 to 60 cents on the dollar, Keith pointed out.

“We raised ($15 million in) capital with a one-time assessment and it turned out to be our life vests,” Keith said. “Had we not been successful in completing the assessment, we would not be around.”

Keith feels growth could be in the cards for the firm and for the Fort Collins office. Ultimate Escapes is headquartered in Orlando, with another office in Kansas City, Mo.; each location employs between 35 and 40. He added that there is no urgent need for consolidation and that maintaining the tenured staff of membership service professionals is an important element to the business. However, he does not rule out office consolidations in the future.

“Never say never,” he said. “If we learned anything else in the last year and a half, it’s that everything can change.”

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