Untitled - Club Intrawest

MEMORANDUM)
!
TO:!
!
!
FROM:!!!!
!
RE:!
!
!
DATE:! !
BOARD!OF!DIRECTORS!OF!CLUB!INTRAWEST!
SPECIAL!COMMITTEE!OF!THE!BOARD!OF!DIRECTORS!OF!CLUB!INTRAWEST!
ASSIGNMENT!OF!MANAGEMENT!AGREEMENT!
DECEMBER!31,!2015!
)
I.
Background)
)
On!November!24,!2015,!Intrawest!ULC!and!Intrawest!U.S.!Holdings!Inc.!(collectively,!“IRCG”)!entered!into!
an!agreement!(the!“Purchase!Agreement”)!with!Diamond!Resorts!Corporation!(“Diamond”),!an!indirect!
whollyVowned!subsidiary!of!Diamond!Resorts!International,!Inc.!(“DRII”),!pursuant!to!which!Diamond!is!
acquiring! from! IRCG! the! assets! used! primarily! in! connection! with! IRCG’s! development! of,! selling! of!
interests!in,!and!management!of!Club!Intrawest!(the!“Club”).!!
!
The!purchased!assets!include:!
a) All!timeshare!interests!in!the!Club!(“Resort!Points”)!held!by!IRCG;!
b) The! reservation! system! developed! by! IRCG! for! members! of! the! Club! (the! “Club! Members”)! to!
reserve!accommodations;!
c) The!internal!exchange!program!for!Club!Members,!operated!by!IRCG;!
d) All!of!IRCG’s!rights!as!a!secured!party!under!all!purchase!agreements!providing!for!financing!in!
connection!with!purchases!of!memberships!in!the!Club;!and!
e) All!of!IRCG’s!rights,!title,!and!interest!(i)!as!“Declarant”!pursuant!to!the!Nineteenth!Amended!and!
Restated! Master! Declaration! for! the! Club,! effective! May! 30,! 2012! (the! “Declaration”);! and! (ii)!
under!all!trust!agreements!and!trust!indenture!agreements!relating!to!the!Club.!
!
In!addition,!the!Purchase!Agreement!provides!for!IRCG!to!assign!to!Diamond!(the!“Assignment”)!its!rights!
and!responsibilities!as!the!Club’s!manager!under!the!Restated!Management!Agreement!dated!March!26,!
2009!(the!“Management!Agreement”).!!Under!the!terms!of!the!Management!Agreement,!the!Assignment!
is!subject!to!the!prior!written!consent!of!the!Board!of!Directors!of!the!Club.!!The!transfer!of!the!other!
assets!purchased!by!Diamond!under!the!Purchase!Agreement!is!not!subject!to!the!review!or!consent!of!
the!Club.!!
!
IRCG! notified! Ken! Smith! and! James! Orr! (the! “Independent! Directors”)! of! the! Board! of! the! Club! of! the!
potential!transaction!with!Diamond,!and!on!December!2,!2015,!IRCG!submitted!a!formal!request!to!the!
Independent!Directors!to!form!a!special!committee!to!determine!whether!to!approve!the!Assignment!(the!
“Special! Committee”).! ! The! Board! members! who! are! employees! of! IRCG! recused! themselves! from!
participating!in!the!decision!due!to!potential!conflicts!of!interest.!!!!
!
The!Special!Committee!performed!due!diligence!with!respect!to!the!Assignment!over!the!course!of!five!
weeks,! including! retaining! the! assistance! of! outside! legal! counsel,! reviewing! the! Club’s! governing!
documents! and! contracts! with! IRCG,! reviewing! DRII’s! financial! and! operating! history,! visiting! resorts!
)
managed!by!Diamond,!meeting!with!senior!DRII!and!Diamond!management,!speaking!with!Diamond!staff,!
members!and!guests,!and!researching!reviews!posted!regarding!DRII,!Diamond,!and!the!resorts!managed!
by!Diamond.!!!
!
II.
Requirements)for)Assignment)of)Management)Agreement!
!
The!Club!is!a!Delaware!nonprofit,!nonVstock!corporation.!As!such,!the!fiduciary!duties!and!obligations!of!
the!members!of!its!Board!of!Directors!will!be!governed!by!Delaware!law.!!The!Management!Agreement,!
however,!is!expressly!governed!by!and!is!to!be!construed!in!accordance!with!the!laws!of!the!Province!of!
British!Columbia.!!Accordingly,!while!the!actions!of!the!Board!members!will!be!subject!to!scrutiny!under!
the! standards! imposed! by! Delaware! law,! the! rights! of! the! Club! regarding! the! assignment! of! the!
Management!Agreement!and!any!basis!or!grounds!for!objecting!to!such!assignment!will!be!governed!by!
the!laws!of!British!Columbia.!
!
Under!Delaware!law,!directors!of!a!corporation,!in!discharging!their!management!function,!owe!fiduciary!
duties!of!fairness,!care!and!loyalty!to!the!corporation!and!its!shareholders,!and!are!not!permitted!to!use!
their!position!of!trust!and!confidence!to!further!their!private!interests.!!To!avoid!liability!for!a!breach!of!
their!fiduciary!duties,!directors!must!exercise!independent!and!disinterested!business!judgment.!
!
In!an!effort!to!encourage!the!full!exercise!of!their!managerial!powers,!Delaware!law!protects!the!directors!
of! a! corporation! through! the! “business! judgment! rule.”! ! This! rule! “is! a! presumption! that! in! making! a!
business!decision!the!directors!of!a!corporation!acted!on!an!informed!basis,!in!good!faith!and!in!the!honest!
belief!that!the!action!taken!was!in!the!best!interest!of!the!company.”!!Nevertheless,!a!showing!that!the!
board!breached!either!its!fiduciary!duty!of!due!care!of!its!fiduciary!duty!of!loyalty!in!connection!with!a!
challenged!transaction!may!rebut!this!presumption.!A!failure!to!act!in!good!faith!may!be!shown!(1)!where!
the! director! intentionally! acts! with! a! purpose! other! than! that! of! advancing! the! best! interests! of! the!
corporation;!(2)!where!the!director!acts!with!the!intent!to!violate!applicable!positive!law;!or!(3)!where!the!
director!intentionally!fails!to!act!in!the!face!of!a!known!duty!to!act,!demonstrating!a!conscious!disregard!
for!his!or!her!duties.!In!Re!Walt!Disney!Co.!Derivative!Litig.,"906!A.2d!27!(Del.!2006).!!A!failure!to!satisfy!
the!duty!of!care!can!be!shown!if!board!members!fail!to!inform!themselves!of!all!material!information!
reasonably!available!to!them!in!making!the!business!decision!and!considering!alternatives.!!Id."
!
The! Special! Committee! has! been! advised! that! under! the! governing! documents! of! the! Club! (i.e.,! the!
Declaration,!Bylaws!and!Articles!of!Incorporation),!the!Club!only!has!the!power!to!approve!or!withhold!
approval!of!the!Assignment!of!the!Management!Agreement.!!IRCG!may!sell!its!Resort!Points!and!assign!its!
interests!as!the!Declarant!without!Club!consent.!!!
!
The!Management!Agreement!automatically!renews!annually!on!January!1!each!year,!unless!otherwise!
terminated.! ! Among! other! things,! IRCG! may! terminate! the! Management! Agreement! on! ninetyVdays!
notice.! ! The! Club! may! terminate! the! Management! Agreement! by! a! vote! of! the! nonVdeclarant! Club!
Members!electing!not!to!renew!the!agreement!(as!of!January!2017!at!the!earliest).!!Accordingly,!the!scope!
of!the!Special!Committee’s!role!is!to!determine!solely!whether!or!not!to!consent!to!the!Assignment!of!an!
agreement!that!may!be!terminated!by!the!assignor!on!relatively!short!notice.!!The!Special!Committee!has!
been!advised!that!it!may!not!legally!bind!IRCG!to!remain!as!manager!beyond!the!terms!of!the!Agreement!
and!cannot!presently!terminate!the!Agreement!and!seek!a!different!manager.!!!
!
The!Board!of!Directors!of!the!Club!has!the!power!to!consent!to!the!Assignment!on!behalf!of!the!Club;!Club!
Member! consent! is! not! required.! In! addition,! the! Special! Committee! was! advised! that! under! British!
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Columbia!law,!there!are!no!specific!statutory!grounds!or!standards!that!are!required!to!be!followed!when!
consenting!to!an!assignment.!!!
!
III.
Diamond)Resorts)Corporation)and)Diamond)Resorts)International,)Inc.!
!
DRII!and!Diamond!are!fully!focused!on!resort!management!and!timeVshare!properties.!!DRII!manages!99!
resort!properties!and!seven!timeVshare!clubs!(the!“Diamond!Collections”)!worldwide.!!Their!resorts!are!
located!in!beach,!mountain,!ski!and!major!city!locations!in!the!continental!United!States,!Hawaii,!Mexico,!
the!Caribbean,!Europe,!and!the!Mediterranean.!!DRII’s!network!includes!an!additional!250!resorts!and!
four!cruise!itineraries,!which!it!does!not!manage,!which!are!available!for!its!members!to!use!as!vacation!
destinations.!!Like!the!Club,!DRII!operates!on!a!pointsVbased!system.!
!
DRII!has!significant!recent!integration!experience,!including!seven!transactions!over!the!last!five!years,!
including!these!six!club!integrations:!
!
2010! ILX!Resorts!(10!resorts/18,000!members)!
2011! Tempus!Resorts!(2!resorts/44,000!members)!
2012! Pacific!Monarch!Resorts!(9!resorts/75,000!members)!
2012! Aegean!Blue!(5!resorts/7,400!members)!
2013! Island!One!Resorts!(8!resorts/25,000!members)!
2015! Goldkey!Resorts!(6!resorts/30,000!members)!
!
DRII!had!approximately!7,800!employees!as!September!30,!2015,!and!total!revenue!of!$844.6M!in!2014.!
!
IV.
Due)Diligence)
)
A.
Meetings)with)Diamond!!!
!
The!Special!Committee!visited!DRII!headquarters!in!Las!Vegas!from!December!6!–!8,!2015,!and!
met!with!the!following!members!of!the!DRII!leadership!team:!
• Ronan!O’Gorman,!SVP!Resort!Operations!
• Howard!Lanznar,!EVP/CAO!
• Sarah!Hulme,!SVP!Club!Operations!
• Brian!Garavuso,!EVP/CIO!
• Stevi!Wara,!VP!Creative!Services/Brand!Management!
• Jason!Toste,!SVP!Inventory!Management!
• Pam!Martin,!Director!Inventory!Operations!
• Tony!Walker,!SVP!Sales!&!Marketing!(Western)!
• Nizar!Jabara,!SVP!Global!HR!
• Yanna!Huang,!VP!Strategic!Initiatives!
!
The!DRII!team!highlighted!their!history!and!vision,!outlined!their!plans!for!the!integration!of!the!
Club!into!the!DRII!portfolio,!and!demonstrated!their!corporate!culture!and!work!environment.!!
The! Special! Committee! questioned! senior! management! and! department! heads! extensively! on!
property! management,! human! resources,! risk! management,! capitalization,! club! membership!
structures,! development! plans,! due! diligence! procedures,! communications! and! membership!
services,!and!other!key!matters.!DRII!demonstrated!a!professional!corporate!culture!and!strong!
work!environment.!!Their!exclusive!focus!on!the!timeVshare!resort!industry!has!enabled!them!to!
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develop! systems! that! appear! ideally! designed! to! support! time! share! resorts! and! provide!
opportunities!to!reduce!expenses.!DRII’s!reservation!system!also!appears!wellVdesigned.!!!
!
The! Special! Committee! submitted! followVup! questions! in! writing! to! DRII! regarding! integration!
plans! with! respect! to! employees,! branding,! service! levels,! exchanges,! expenses,! development!
plans,!and!reservation!systems.!!!
!
Expenses.! ! Diamond! anticipates! similar! expenses,! and! thus! Club! Member! dues,! under! its!
management.!!Diamond!expects!some!savings!in!technology!and!telephony!due!to!integration!
with!the!current!Diamond!systems.!!As!part!of!those!systems,!the!Club!would!experience!some!
improvements,!such!as!failover!capability,!that!the!Club!does!not!currently!have.!!Diamond!also!
anticipates!some!savings!in!the!refurbishment!of!vacation!homes!given!Diamond’s!economy!of!
scale.! ! Following! some! prior! assignments,! Diamond! did! increase! member! dues! meaningfully,!
which!raised!a!concern!for!the!Special!Committee.!!However,!Diamond!explained,!and!the!Special!
Committee! confirmed! independently,! that! those! were! situations! where! Diamond! assumed!
management!for!properties!with!financially!distressed/bankrupt!management!associations!and!
significant!deferred!maintenance!and!improvements.!!Moreover,!Diamond’s!goals!and!the!Club’s!
interests! are! fairly! aligned! on! this! point,! as! Diamond’s! success! depends! on! Club! Member!
satisfaction.!
)
Branding.! The! Club! will! have! to! be! rebranded! after! the! transaction,! pursuant! to! terms! of! the!
Management! Agreement! and! the! Declaration! that! prohibit! use! of! the! Intrawest! name! once!
Intrawest!is!no!longer!the!Club’s!manager.!By!law,!Club!Members!are!entitled!to!vote!on!the!new!
branding.!!Diamond!explained!that!it!plans!to!research!a!set!of!names,!get!input!from!the!Club’s!
Board,!vet!names!for!trademark!protection,!and!then!give!the!Club!Members!the!opportunity!to!
vote!on!a!selection!of!names.!!Diamond!expressed!its!belief!that!involving!Club!Members!in!the!
decision!will!provide!a!good!opportunity!to!build!relationships!with!the!Club!Members.!Diamond!
will!be!looking!for!branding!to!continue!the!feel!of!exclusivity!that!the!Club!currently!enjoys.!!!
!
Services!and!Staffing.!!Diamond!states!that!its!plans!to!maintain!many,!if!not!all,!of!the!services!
provided!today!and!retain!the!majority!of!IRCG’s!employees!who!currently!manage!the!Club.!!The!
Club’s! amenities! and! services! are! governed! by! the! Management! Agreement;! however,! the!
manager!maintains!meaningful!discretion!over!many!of!the!services.!Accordingly,!it!will!remain!
important! that! the! Club! Members! provide! feedback! to! Diamond! and! that! the! Board! actively!
review! the! management! to! ensure! satisfactory! services.! The! Special! Committee! spoke!
anonymously! with! Diamond! Collection! members! who! reported! improvements! in! facilities! and!
services! following! Diamond’s! assumption! of! management.! ! The! Special! Committee! also! spoke!
anonymously! with! staff! members! at! various! Diamond! Collection! properties! and! received! very!
positive! feedback,! including! staffers! who! had! been! retained! after! Diamond! assumed!
management.!
!
Systems.""Diamond!will!integrate!the!Club!properties!into!its!proprietary!CRM,!member!account!
management,! reservation,! and! property! management! system.! It! has! experience! with! this!
integration!process!and!seems!well!prepared!to!provide!a!positive!transition!experience!for!Club!
members.!!The!Special!Committee!anticipates!that!Club!Members!will!find!the!system!to!be!an!
improvement.!
!
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Access!to!Other!Properties.""The!Club!will!remain,!as!is,!a!separate!Delaware!nonVprofit!nonVstock!
corporation.!The!Club’s!total!Resort!Points!will!not!change,!its!physical!assets!will!remain!in!trust!
exclusively! for! Club! Members,! and! its! capital! accounts! remain! the! property! of! the! Club,! as!
required!by!the!Club’s!governing!documents.!!Diamond!intends!to!offer!Club!Members!the!option!
of!exchanging!their!Resort!Points!in!exchange!for!Diamond!points,!but!no!member!will!be!required!
to!do!so.!Each!member!controls!that!decision!for!themselves.!!This!may!be!a!benefit!to!members!
who!wish!to!have!access!to!a!larger!group!of!properties!and!more!locations.!The!possibility!of!
exchanging!Resort!Points!has!raised!a!concern!of!overVbooking!of!Club!properties!with!members!
of!other!Diamond!clubs;!however,!the!Declaration!governs!the!reservation!of!resort!properties!by!
nonVClub!Members!in!detail!and!cannot!be!modified!without!the!approval!of!the!nonVDeclarant!
Club!Members.!This!also!has!not!been!a!reported!concern!after!Diamond’s!prior!integrations.!!As!
is!currently!the!case!with!IRCG,!Diamond!will!utilize!various!programs!to!fill!unused!resort!rooms,!
generating!revenue!for!the!Club!(a!portion!of!which!is!shared!with!Diamond)!to!the!extent!the!
unused!rooms!are!associated!with!Member!Resort!Points.!!Diamond!may!otherwise!only!make!
Club!rooms!available!to!the!extent!of!Diamond’s!Resort!Point!ownership,!as!is!currently!the!case!
with!IRCG.!!Overall,!Diamond’s!plans!are!wellValigned!with!the!Club’s!culture!and!priorities.!!
!
!
B.
Property)Visits!!
!
The!Special!Committee!visited!eight!properties!managed!by!Diamond/DRII:!
• Polo!Tower!Suites!and!Villas,!Las!Vegas,!Nevada!
• Cancun!Resort!Villas,!Las!Vegas,!Nevada!
• Desert!Paradise!Resort,!Las!Vegas,!Nevada!
• Mystic!Dunes,!Orlando,!Florida!
• Grand!Villas,!Orlando,!Florida!
• Grand!Beaches,!Orlando,!Florida!
• Cabo!Azul!Resort,!Cabo!San!Jose,!Mexico!
• Ka’anapali!Beach!Club,!Maui,!Hawaii!
The! Special! Committee! met! with! local! management! and! staff,! including! maintenance,!
housekeeping,! front! desk,! member! services,! and! more.! ! The! Special! Committee! also! had! the!
opportunity!to!speak!privately!with!a!number!of!members!and!guests!about!their!experiences!at!
the!properties.!Those!conversations!were!casual!conversations!initiated!by!the!Special!Committee!
members!on!an!anonymous!basis.!!
!
The!resorts!were!extremely!wellVrun,!with!particularly!warm!and!welcoming!professional!staff.!!
The!facilities!are!developed!and!maintained!consistent!with!their!level,!and!improvements!made!
to!the!properties!were!wellVdesigned!and!appealing.!!Members!and!guests!enjoyed!the!addition!
of!restaurants!and!pool!side!bars!at!some!locations.!!Service!level!audits!are!performed!almost!
daily,!and!the!properties!actively!compete!with!one!another!for!service!awards.!!Members!and!
guests!reported!very!positive!experiences.!!The!Special!Committee!noted!that!the!décor!was!fairly!
consistent! between! properties,! and! somewhat! generic,! and! expressed! the! importance! of!
maintaining!the!Club’s!distinctive!style.!!Overall,!the!Special!Committee’s!experiences!on!these!
visits!were!a!strong!indication!of!Diamond’s!ability!to!manage!the!Club’s!resorts!well.!
!
)
)
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C.
Reputation)Review!!!
!
The!Special!Committee!reviewed!hundreds!of!customer!reviews!regarding!Diamond!memberships!
and!prior!Diamond!acquisitions,!and!onVline!guest!reviews!of!a!selection!of!resorts!managed!by!
Diamond.!!Guest!reviews!of!DiamondVmanaged!resorts!are!highly!favorable!and!similar!to!those!
of!the!current!Club!resorts.!!Diamond!members!use!approximately!94%!of!their!member!points!at!
Diamond!resort!properties!each!year,!which!is!a!strong!indication!of!members’!satisfaction!with!
their!clubs.!!The!Club’s!usage!rate!is!similar.!!
)
The! Special! Committee! noted! that! the! majority! of! onVline! complaints! about! Diamond! concern!
aggressive!sales!practices!and!the!limited!market!to!resell!memberships,!similar!to!Club!Intrawest!
and!other!timeVshares.!Diamond’s!reputation!differs!from!the!Club’s!in!that!Diamond!is!a!much!
larger! company! and! manages! and! affiliates! with! resorts! across! a! range! of! service! and! quality!
levels.!!The!Club!will!be!using!the!entity!structure!and!branding!of!the!collection!to!preserve!its!
upscale!boutique!reputation.!!
!
D.
Review)of)Diamond’s)Financial)Reports))!
!
DRII!is!a!holding!company,!and!its!principal!asset!is!its!wholly!owned!subsidiary,!Diamond.!!DRII!
became!a!publicly!traded!company!in!July!2013!(NYSE:!DRII).!!Based!on!its!unaudited!financial!
report!for!the!nineVmonth!period!ending!September!30,!2015,!DRII!had:!
• Shareholder!equity!of!$306.6M!(versus!$267.3M!at!12/30/14)!
• Liabilities!of!$1.5B!(versus!1.3B!at!12/30/14)!
• Cash!of!$326.6M!(versus!$242.5M!at!12/31/14)!
• Revenues!of!$680.4M!(versus!$612.2M!at!9/30/14)!
• Net!income!of!$99.7M!(versus!$36.3M!at!9/30/14)!!
!
DRII’s!revenue!comes!primarily!from!sales!of!time!share!interests!at!the!resorts!it!manages!and!
secondarily!from!management!fees!for!its!services.!!Its!primary!assets!are!mortgages/contracts!
receivable,!cash,!and!time!share!interests!in!inventory.!!DRII!uses!credit!to!finance!the!consumer!
loans!that!it!provides!to!customers!to!purchase!their!time!share!interest.!The!principal!balance!on!
DRII’s!borrowings!totaled!$1.03B!as!of!9/30/15!(versus!$954.5K!as!of!12/31/14).!!On!December!4,!
2015,! DRII! closed! on! additional! $150M! loan.! ! Analysts! generally! favor! DRII! for! its! growth! in!
revenue!and!net!income,!though!they!note!that!it!has!a!high!debt!management!risk.!It!appears!
much!of!DRII’s!revenue!growth!has!been!through!recent!corporate!transactions.!!!
!
DRII! appears! to! be! a! financially! sound! company! with! sufficient! cash! and! access! to! funding! to!
enable!Diamond!to!perform!its!management!services!for!the!Club.!
!
E.
Review)of)Alternatives!!!
!
The!Management!Agreement!is!not!currently!up!for!renewal!or!termination,!and!the!scope!of!the!
Special!Committee’s!review!is!limited!to!whether!the!Club!should!consent!to!IRCG’s!assignment!
of!the!Management!Agreement.!!IRCG!provided!the!Special!Committee!with!a!summary!of!the!
key! terms! of! the! Purchase! Agreement! and! provided! the! attached! overview! of! its! process! in!
selecting! Diamond.! IRCG! highlights! the! trend! of! consolidation! in! the! hospitality! industry! and!
describes!an!auction!process!conducted!for!IRCG!by!Deutsche!Bank,!resulting!in!two!final!bidders.!!
IRCG!believed!Diamond!to!be!the!superior!bid!based!on!price!and!IRCG’s!confidence!in!Diamond’s!
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PAGE!6!!
ability! to! complete! the! transaction! and! accomplish! a! smooth! transition,! given! Diamond’s!
capabilities,! experience,! and! plans! to! retain! the! majority! of! IRCG! employees! who! manage! the!
Club.!!
!
The!Special!Committee’s!task!was!to!decide!whether!approving!the!assignment!to!Diamond!would!
be!in!the!best!interests!of!the!Club!Members.!!Accordingly,!in!addition!to!evaluating!Diamond!as!
a!potential!manager,!the!Special!Committee!evaluated!the!alternative:!!The!consequences!of!not!
approving!the!assignment.!!!
!
Among!other!things,!the!Special!Committee!noted!that:!!
)
1)
IRCG!can!sell!its!Resort!Points!and!other!ClubVrelated!assets!without!the!consent!of!the!
Club.!!Consent!is!required!only!in!connection!with!the!assignment!of!the!Management!
Agreement;!
2)
IRCG!can!terminate!the!Management!Agreement;!!
3)
IRCG!does!not!view!Club!operations!as!a!core!segment!of!its!business!and!wants!to!divest!
the!Club!operations;!
4)
The!most!significant!value!in!the!transaction!to!a!potential!purchaser!is!the!ability!to!sell!
and! finance! Resort! Points,! not! the! revenue! from! the! Management! Agreement.! ! The!
greatest! likelihood! of! the! Club! having! a! strong! manager! would! be! through! a! bundled!
transaction! such! as! the! one! proposed.! ! Moreover,! due! to! the! nature! of! the! corporate!
structure,! it! would! be! difficult! to! split! out! the! management! entity! from! the! Declarant!
entity;!and!
5)
If!the!transaction!fails!publicly,!the!reputation!of!the!Club!and!value!of!Resort!Points!could!
be!damaged,!and!the!Club’s!ability!to!accomplish!a!smooth!transaction!in!cooperation!
with!IRCG!could!be!hampered.!
!
While!the!Special!Committee!could!have!pursued!arbitration!or!other!attempts!to!work!with!IRCG!
to!evaluate!other!options,!the!process!would!have!put!the!Diamond!transaction!in!jeopardy.!
!
F. Member)Input!
!!!
Although!the!Management!Agreement!is!not!a!matter!for!a!vote!of!the!Club!Members,!the!Club!
Members’! views! are! relevant.! Club! Members! submitted! both! positive! and! negative! views!
regarding!the!proposed!assignment.!The!most!vocal!members!expressed!their!desire!to!remain!
with!IRCG.!!However,!those!Club!Members!did!not!understand!that!remaining!with!IRCG!was!only!
a!short!term!option.!!The!Special!Committee!observed!similar!member!angst!with!other!clubs!in!
advance! of! Diamond’s! assumption! of! management! and! immediately! after! the! transaction.!!
However,! once! those! clubs’! members! (and! staff)! experienced! Diamond’s! management,! they!
reflected!highly!favorable!experiences,!and!Diamond!enjoys!high!member!usage!rates!at!these!
properties!today.!
!
)
CLUB!INTRAWEST!V!REPORT!OF!THE!SPECIAL!COMMITTEE!
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PAGE!7!!
V.
Decision)and)Recommendations)
!
Based!on!its!investigation!of!Diamond!and!DRII,!the!Special!Committee!believes!that:!!(a)!Diamond!is!well!
qualified!to!assume!the!management!functions!under!the!Management!Agreement!for!the!Club;!and!(b)!
Approving!the!assignment!is!in!the!best!interests!of!the!Club!Members!under!the!circumstances.!!The!
Special!Committee!approves!the!Club’s!consent!to!IRCG’s!assignment!of!its!interests!in!the!Management!
Agreement!to!Diamond.!
!
In!addition,!the!Special!Committee!recommends!the!following!to!the!Board:!
!
a)
Increase!Club!Member!representation!on!the!Board!of!Directors.!!Given!the!role!of!the!manager!
and!its!broad!discretion,!having!a!majority!of!the!Board!comprised!of!independent!Club!Members!
helps! ensure! the! interests! of! the! Club! and! the! manager! are! wellValigned! and! helps! boost!
membership!perceptions!of!the!Board!and!the!value!of!membership.!This!shift!also!could!help!
ease!Club!Members’!concerns!about!the!transition!to!Diamond.!!IRCG!holds!3.6%!of!the!Club’s!
Resort!Points!(with!preferential!voting,!currently!36%!of!the!vote)!and!three!of!the!Board’s!five!
seats!are!occupied!by!IRCG!employees.!!Club!Members!could!be!given!the!opportunity!to!replace!
a!Board!Member!with!an!independent!Club!Member.!!Alternatively,!the!Club’s!bylaws!permit!the!
board!size!to!increase!to!seven,!so!the!Club!could!add!two!seats!to!the!Board!so!the!Club!Members!
could!elect!two!more,!for!a!total!of!four.!
!
b)
Work! closely! with! Diamond! during! the! integration! to! ensure! Club! Member! priorities! are!
addressed!in!the!reVbranding!process,!setting!points!exchanges,!and!handling!other!aspects!of!the!
transition.!!!
!
c)
Following! the! integration,! the! Board! should! monitor! the! increases! or! decreases! in! costs,!
reductions!in!membership!benefits,!services!or!quality!of!the!Club’s!resorts.!!!
!
d)
The!Board!should!stay!focused!with!Diamond!on!maintenance!of!the!unique!décor!and!style!of!
the!resorts!as!the!properties!are!redecorated!over!time.!
!
!
!
CLUB!INTRAWEST!V!REPORT!OF!THE!SPECIAL!COMMITTEE!
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PAGE!8!!
Intrawest!Resort!Club!Group!Transaction!Overview!
!
Market!environment!
!
The!hospitality!and!timeshare!industries!have!undergone!significant!consolidation!over!the!
past!several!years!as!companies!take!advantage!of!broader!economic!recovery!and!peak!level!
valuations.!Operators!have!delivered!strong!financial!performance!and!improved!balance!sheets,!
which! in! turn! has! renewed! investor! confidence.! As! organic! growth! from! occupancy! and! rate!
increases!has!slowed!in!the!current!stage!of!the!lodging!cycle,!companies!have!taken!advantage!
of!favorable!market!conditions!to!seek!growth!via!acquisitions.!The!largest!operators!in!particular!
have!found!M&A!an!attractive!avenue!for!growth!as!they!are!able!to!extract!more!value!from!
successful!acquisitions!due!to!their!ability!to!realize!synergies!and!take!advantage!of!economies!
of!scale.!Notable!recent!acquisitions!include:!
!
V Interval!Leisure!Group’s!acquisition!of!Hyatt!Residential!Group!(May!2014)!
V Jin!Jiang!International’s!acquisition!of!Louvre!Hotels!(November!2014)!
V InterContinental!Hotels’!acquisition!of!Kimpton!Hotels!&!Restaurants!(December!2014)!
V Marriott!International’s!acquisition!of!Delta!Hotels!&!Resorts!(January!2015)!
V Wyndham!Hotel!Group’s!acquisition!of!Dolce!Hotels!&!Resorts!(February!2015)!
V Orange!Lake’s!acquisition!of!Silverleaf!Resorts!(May!2015)!
V Barcelo!Corporation’s!acquisition!of!Occidental!Hotels!&!Resorts!(June!2015)!
V Diamond!Resorts’!acquisition!of!Gold!Key!Resorts!(August!2015)!
V Interval!Leisure!Group’s!acquisition!of!Vistana!(October!2015)!
V Marriott!International’s!acquisition!of!Starwood!Hotels!&!Resorts!(November!2015)!
V Accor’s!acquisition!of!Fairmont!(December!2015)!
!
Transaction!summary!
!
The! Intrawest! Resort! Club! Group! (IRCG)! sale! was! conducted! as! a! full! auction! process.!
Deutsche! Bank! began! by! reaching! out! to! 14! potential! acquirers,! 10! strategic! buyers! and! four!
financial!buyers.!This!represented!one!half!of!the!buyers!IRCG!contacted!in!its!2007!process,!due!
to!consolidation!in!the!industry!significantly!reducing!the!bidder!universe.!Of!these!14!potential!
bidders,!there!was!significant!interest!with!10!of!the!14!signing!nonVdisclosure!agreements!and!
receiving!the!IRCG!confidential!information!memorandum.!
After!an!initial!review!of!the!marketing!materials!by!these!10!potential!bidders,!Deutsche!
Bank!received!nonVbinding!initial!indications!of!interest!from!five!bidders!and!decided!to!proceed!
with! three! of! these! bidders! in! the! second! round! of! the! process.! None! of! the! parties! that!
submitted!first!round!bids!were!financial!sponsors,!as!they!deemed!IRCG!too!small!to!operate!as!
a!standalone!entity.!!
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The! second! round! included! access! to! a! dataroom! with! detailed! information! on! the!
company!and!access!to!management!to!discuss!the!opportunity.!After!the!bidders!completed!
additional! diligence,! Deutsche! Bank! received! second! round! bids! and! advised! Intrawest! to!
proceed!with!two!bidders!into!a!short!third!round!process.!!
!
The! third! round! included! additional! diligence! information,! site! visits! and! further!
discussions!with!management.!Both!remaining!parties!submitted!final!bids!and!markVups!of!a!
purchase!agreement.!!
!
After!reviewing!both!the!financial!terms!of!the!bids!and!the!purchase!agreement!markV
ups,!it!was!determined!that!the!Diamond!Resorts’!(“Diamond”)!bid!was!superior!to!the!second!
bid!both!in!price!and!confidence!that!an!agreement!on!terms!could!be!reached.!!
!
IRCG!considered!several!additional!factors!in!assessing!the!desirability!of!the!Diamond!
bid,!determining!that!Diamond!was!likely!to!be!able!to!complete!a!transaction!in!a!timely!manner!
and!ensuring!a!smooth!transition!for!Club!Intrawest!members.!These!factors!include:!
!
V Diamond’s!successful!track!record!of!prior!acquisitions,!including!most!recently!Gold!Key!
Resorts!in!August!2015!
V Diamond’s!demonstrated!ability!as!a!large!timeshare!operator!with!a!strong!management!
platform!
V Diamond’s!stated!intent!to!invest!in!the!IRCG!properties!and!improve!the!quality!of!the!
assets!
V Diamond’s! commitment! to! the! sale! process! and! engagement! from! individuals! at! the!
highest!levels!of!management!
V Diamond’s!stated!intent!to!retain!the!majority!of!IRCG!employees!
!
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