CUC, HFS Agree to Merge
In $10.9 Billion Stock Swap
Both Companies' Chiefs Agree
To Switch Jobs After 3 Years
By JON BIGNESS and JARED SANDBERG
Staff Reporters of THE WALL STREET JOURNAL
CUC International Inc. and HFS Inc. said they agreed to merge in a $10.9
billion stock swap that pairs a huge direct-marketing company with a
fast-growing franchiser eager to market products to its many customers.
The combined company hopes to become a marketing juggernaut, pitching
a variety of services to millions of travelers and homeowners. CUC, of
Stamford, Conn., is best known for its coupon books and traveler and
shopper-membership clubs. HFS, of Parsippany, N.J., owns such
well-known operations as Ramada Inn, Howard Johnson, Century 21
Real Estate, Coldwell Banker and Avis Inc. Combined, the HFS units
reach one of every six hotel guests, one of every five home buyers and one
of every four car-rental customers.
"We can, over time, offer every credit-card-worthy household in the world
everything through CUC," said Walter A. Forbes, CUC's 54-year-old
chairman and chief executive officer.
Two Strong-Willed Executives
The combination also will pair two strong-willed executives who, in an
unusual move, have agreed to switch jobs after three years. Henry R.
Silverman, HFS's aggressive 56-year-old chairman and chief executive,
will start as the merged company's president and chief executive officer;
Mr. Forbes, will begin as chairman. Then, on Jan. 1, 2000, the two have
agreed to swap chairs.
Mr. Silverman says the two decided on the swap over dinner, concluding
that the management structure should reflect that the deal is a merger of
equals. Mr. Silverman says he will be chief executive first because he is
two years older. Each executive has a five-year contract with the new
company, which hasn't yet been named.
Terms of the transaction call for each HFS share to be exchanged for about
2.4 CUC shares. CUC will issue about 434 million new shares for the
swap. The exchange ratio values HFS at about $60.08 a share, based on
CUC's closing price of $25, down 12.5 cents in New York Stock
Exchange composite trading. That value is just above HFS's closing price
Tuesday of $59, up $2, in Big Board trading.
CUC has marketed its travel services to HFS's regular hotel customers
since 1994, and the two started flirting with the idea of a marriage earlier
this year. Though CUC and HFS were both rumored to be looking at
buying another direct-marketing firm, their talks began to heat up in the
past two months after concluding they could help each other sustain
long-term growth and profits.
'Cash-Flow Monster'
Craig Bibb, analyst at PaineWebber Inc., said the combination would
create a "cash-flow monster," with $1 billion in earnings before interest,
taxes, depreciation and amortization and minimal debt.
But the monster could be a lumbering one. "It's going to become very
difficult for the company to sustain a growth rate above 25%, which is
what the two companies were doing individually," said Mr. Bibb, noting
that "gravity" will slow them down.
But Mike Mueller, analyst with Montgomery Securities, disagrees. A 25%
growth rate is "achievable if they can take advantage of successfully
integrating their operations" and mining each others' databases, he said.
Still, Mr. Forbes says that the transaction, which is expected to close in
October, will add slightly to the company's earnings. Analysts had
estimated CUC would earn roughly 89 cents a share for the fiscal year
ending next January, according to First Call, a research firm. Now, Mr.
Forbes anticipates that the company will earn 97 cents a share for the year,
while jumping to $1.23 a share from analysts' estimates of $1.10 a share
for fiscal 1999. The company also expects to be an active acquirer that can
pursue bigger deals than HFS or CUC could swallow alone.
The two also expect to find many marketing opportunities among HFS's
various units. With few of HFS's customer in CUC's clubs, Mr.
Silverman figures HFS can bring in 6.5 million to 10 million new
members a year for CUC's programs. And he has been looking for some
time for a better way to sell goods to his customers. "Our distributions
systems [now] are tent cards in hotel rooms and hanger cards in rear-view
mirrors," he said in an interview earlier this year.
No Layoffs Are Expected
Under the agreement, each company will have an equal number of
representatives on the new board. Officials said they expect to keep both
headquarters operating and said they don't expect to reduce the combined
work force of about 45,000. The combined company will be about equally
owned by HFS and CUC shareholders. The deal is expected to be
accounted for as a pooling-of-interests transaction.
Mr. Silverman will own or have options on between 5% and 6% of the
new company; Mr. Forbes will have about 1%.
Neither company owns much in the way of fixed assets, preferring instead
to offer a variety of high-margin services to others. On a pro forma basis,
including its recent purchases, HFS would have had 1996 net income of
$309 million, or $1.75 a share, on revenue of about $2 billion.
For the year ended Jan. 31, CUC had net income of $164.1 million, or 41
cents a share, on revenue of $2.35 billion. The results included about $180
million in merger and litigation charges related to acquiring software
providers Sierra On-Line Inc. and Davidson & Associates Inc. and Ideon
Group Inc.
CUC charges its members an annual fee for the right to purchase goods
and services at discount rates. Begun as CompU-Card of America in 1973,
CUC also has been angling to develop on-line revenue, acquiring
high-tech firms to bring on-line expertise in house.
Bear Stearns & Co. and Merrill Lynch & Co. represented HFS in the
transaction; Goldman, Sachs & Co. was CUC's financial adviser. |
