Cendant sees value across the great divide

NEW YORK -- Its splitsville for Cendants four travel and real estate business lines.

In an attempt to boost its total valuation, the $18 billion conglomerate decided to divide itself into four focused, independent public companies.

The betting at Henry Silvermans travel and real estate conglomerate is that the stock prices of the four as-yet-unnamed divisions -- focusing on travel distribution, hospitality, vehicle rental, and real estate -- will be 25% to 30% higher after Cendant ceases to exist and the new spin-offs hit the street, so to speak, next year.

Cendant initially said the spin-offs would take place next summer. However, late last week the company revealed that it was exploring the possibility of accelerating the timetable and shedding the real estate and hospitality businesses several months earlier, perhaps in May 2006.

As of press time, Wall Street seemed decidedly unimpressed with Cendants attempt to breathe new value into some of the biggest names in travel, from Avis and Wyndham to Orbitz and Galileo.

At the Oct. 26 stock market close, two days after Cendant revealed that its board had voted itself out of existence, the price of Cendants stock (CD on the NYSE) closed at $17.74, 11.7% lower than the pre-announcement close on Oct. 21.

However, in analyzing why the share price had dropped, it was hard to separate the impact of the divestiture announcement from Cendants off-pace third quarter net earnings report and downward guidance for the fourth quarter and year.

In a show of faith, Chairman and CEO Silverman, who would hold the same titles in the spun-off travel distribution business, exercised 5 million stock options on Oct. 25, placing about 1.24 million new shares in his portfolio.

Silverman, a controversial figure because of his very ample compensation package, now directly owns 9.24 million shares and holds 25 million options for about a 3.5% stake.

Jake Fuller, a research analyst for Thomas Weisel Partners, said the spin-off plan makes sense in theory, but ... the market has not responded well to these types of transactions.

After IAC/InterActiveCorp spun-off Expedia Inc. in August, there was much conjecture that Cendant would do likewise with its travel distribution businesses.

But the combined valuation of IAC and Expedia Inc. is about 12% lower today than it was before the spin-off. Similarly, Viacoms valuation has fallen about 8% since March, when it first floated its plan to divide the firm into two public companies.

Like IAC/Expedia, the Cendant plan is designed to clear up alleged investor confusion about Cendants far-flung businesses and to maximize the stock prices of the four new companies.

Cendant set the stage for its business break-up plan over the last year by divesting four non-core businesses, including its Marketing Services Division. That transaction, which closed Oct. 17, brought in $1.8 billion, of which $1.7 billion was in cash.  

We have now concluded that it is in the best interests of our shareholders to establish pure-play enterprises, as we and our advisers believe the sum of the parts has a value in excess of our current share price, Silverman stated.

He later told analysts: Doing nothing was not an option.

Among the solutions considered was the sale of the company, but the board concluded no logical strategic buyer existed.

Downbeat earnings news

Cendant reported that net income in the third quarter, pinged by factors like the hurricanes and the London bombings, fell 13.3% year over year to $514 million.

The company also lowered fourth quarter EBITDA guidance, when excluding restructuring charges, from 25% growth to 14%, tied largely to weaknesses in the consumer online and distribution businesses.

Cendant President and CEO Ronald Nelson, who would become chairman and CEO of the new vehicle rental services business, pointed to signs of slowing growth in the third quarter among several of the companys leisure travel businesses.

  Among the factors Nelson cited was the ongoing channel shift to supplier sites, demand weakness in certain key markets in the global distribution business, and continued economic weakness in Europe.

The break-up will result in Cendant shareholders owning stock in four free-standing public companies.

Sam Katz, as vice chairman and president of the travel network business, would be responsible for the operations of more than a dozen brands including Orbitz, Cheap Tickets, Gullivers Travel Associates, eBookers, Orbitz For Business, Travelport and Galileo, as well as several vacation rental businesses.

Many of these businesses feed Cendants Travel Distribution Services (TDS) unit, whose 10% market share ranks it third in U.S. online gross travel bookings. Expedia Inc. leads with 18%. Sabre, at 11%, just edges out Cendant TDS, Fuller said.

The new hospitality business, with Stephen Holmes as chairman and CEO, would be the largest lodging franchisor and timeshare developer in the world. Among its brands would be Ramada, Wyndham, Days Inn, Super 8 and Fairfield Resorts.

With Avis and Budget, the vehicle rental services business -- of which Nelson would be chairman and CEO -- would include two household-name car rental brands.

The car rental business and the hospitality business would have no legacy corporate debt but would take on securitized debt related to rental vehicle assets and timeshare assets, respectively, Cendant stated.

Many industry analysts view Cendants decision to separate the companies as a stock-market play that does not change the nature of the underlying businesses.

However, several observers noted that the process may further distract the travel network business, which is already consumed with integrating the Orbitz technology platform with Cheap Tickets, Lodging.com, Orbitz for Business, Travelport, Gullivers Travel Associates and eBookers.

It doesnt change the underlying positions of the companies, said one competitor, who declined to be identified. All of these Wall Street deals are very confusing, though, and distracting for the average employee, with everyone jockeying for a job.

And what of Cendants synergy strategy -- giving its hotel, vacation rental and car rental brands preferential deals on Orbitz and Cheap Tickets, and making gains through cross-marketing?

The competitor said Cendants major rivals didnt stand for the preferential deals, and headed off much of that effort: They talked about synergies, but I dont think they can monetize it, he said.

Cendants plan in building its travel businesses was to leverage revenue and operating synergies among its holdings. For example, the car rental businesses would provide leads to the timeshare units.

In 2002, Galileo, which had been acquired the previous year, got exclusive vacation rental content from the RCI Holiday Network, and agencies connected to the GDS got $100 bonuses when they enrolled small businesses in the Avis program.

Cendant believes that it wrangled what it could out of these synergies and that many such relationships will be maintained among the four companies through arms-length contracts.

Some observers argue, however, that Cendants lodging and car rental businesses were weakened by the perception that Cendant-owned distributors curried favor.

We maintained the same Galileo practices in terms of display, merchandising and marketing that existed when we bought the company, and in no way did we try to benefit our sister companies in that distribution environment, said Ken Esterow, president and CEO of Cendant Travel Industry Services, Americas. [See related story, In the Hot Seat.]

Perception can be reality, though. In becoming independent, the TDS unit has the potential to eventually lose any perception of bias and preference for sister Cendant brands, said Henry Harteveldt, vice president of travel research for Forrester Research.

Harteveldt predicted that the split-up would be a good thing for TDS.

Right now, the travel distribution group has to fight for management attention and budgetary support with everyone else, he said. They need more and better focus, and splitting off should allow them to gain that. Once they go public, its sink or swim.

Many observers noted that of the four spin-offs, Silverman decided to head the new travel network business, with Katz in charge of operations. Silverman will also be the non-executive chairman of the real estate group, but he told investors he will not be involved in the hospitality or car rental businesses except as a stakeholder.

Regarding his decision to head the travel network business, Silverman told the New York Times that Katz doesnt yet have the experience to be CEO of a public company, but that Silverman intends to remain at the helm for only about two years.

Maybe this means that Silverman doesnt have confidence in Katz as an operator or there are too many problems in the businesses for one person to handle, said one industry veteran. Silvermans and Katzs history is really that of being acquirers and not operators.

Moodys Investors Service for a variety of reasons changed Cendants rating from stable to developing.

The ratings consider that most of the companys business lines do not face substantial industry risks except for the travel distribution segment, Moodys stated.

Esterow said the spin-offs would not be distracting and predicted that the businesses will end up well-positioned.

For us, its a competitive advantage, Esterow said. For our people, they now have the clarity and focus of where their efforts are directed. We think it will streamline processes and be more efficient as we look to separate the companies.

To contact reporter Dennis Schaal, send e-mail to [email protected].