Cendant Hopes Simpler Model Will Lift Stock
By RYAN CHITTUM
Staff Reporter of THE WALL STREET JOURNAL
May 20, 2004
Cendant Corp.'s stock has been on a tear, nearly doubling in value in the past 13 months. But Henry R. Silverman, the company's chairman and chief executive, still likes to complain about the share price.
"No CEO is ever happy with their stock price," Mr. Silverman said at an investor conference in March, "but I am particularly unhappy."
So, Mr. Silverman wants to simplify Cendant's famously hard-to-understand business model, which includes rental cars, hotels, residential brokerage businesses, tax services, travel-distribution systems, relocation services and a mortgage business. Mr. Silverman plans to sell or split off Cendant's financial-services businesses, a move that some analysts agree could close the trading gap between Cendant shares and the rest of the market.
Cendant announced in March that it would split off Jackson Hewitt, its tax-preparation service, in an initial public offering. Other candidates in line to be sold or split off are Trilegiant, its club-membership business, and Progeny Marketing Innovations, its bank-product and services business, executives have said.
Though Cendant's stock price reached its highest point in four years last month, its relatively low price-to-earnings ratio of about 14.5 means the shares trade at about a 25% discount to the S&P 500-stock index. Cendant's chief financial officer, Ronald L. Nelson, says the perceived complexity is largely to blame for the stock's relatively low price, noting that Cendant's fundamentals are better than the average S&P 500 company. The company has moved to simplify its books -- consolidating its off-balance-sheet entities and expensing stock options, for example.
In New York Stock Exchange composite trading at 4 p.m. yesterday, Cendant's shares were down a penny to $22.25.
On the financial-services side, speculation has swirled over Cendant's plan for its mortgage division, which originates and services home loans. Reports in March had the company in discussions to sell off Cendant Mortgage to Countrywide Financial Corp. Cendant denied it was in talks, and a Cendant official now says the company is studying its options with Cendant Mortgage to reduce its inherent volatility. The official maintains, "We'll never be totally out of the mortgage business."
Analysts say it doesn't make sense for Cendant to exit from mortgages. "It's very hard for me to believe that Cendant would completely abandon one of the three spokes of their value circle in real estate, which feed into one another: Mortgage, relocation, and real-estate brokerage," says Jeff Kessler, an analyst at Lehman Brothers, which has done banking work for Cendant.
That value circle begins with the company's residential-brokerage franchisees, including Century 21, Coldwell Banker and ERA, which feed home sellers into its relocation service, Cendant Mobility, and hook them up with a Cendant broker in their new city, who recommends Cendant Mortgage when a new house is picked. Cendant has a hand in about 25% of all real-estate transactions in the U.S., Mr. Nelson says.
More likely than completely ditching the mortgage side is a deal where Cendant would get rid of the volatility of the mortgage business while retaining some toehold that allows it to continue to reap the benefits of the value circle, say some analysts. "If they can shift it so somebody else takes the mortgages on their books and they just pay Cendant a fee for every mortgage generated, that would be great," says Bill Van Tuinen, an analyst for Chicago-based Institutional Capital Corp., which holds just under 20 million shares of the stock. Mr. Van Tuinen added one million shares last month.
"Mortgage makes Cendant's balance sheet look very complicated," says Tim Fidler, director of research for Chicago-based Ariel Capital Management LLC, which holds 14.5 million Cendant shares. But he said he wouldn't want Cendant to sell it.
Even without selling the mortgage business, Cendant can generate about $3 billion to $4 billion by selling off its noncore, financial-services assets, Mr. Silverman has said. That is on top of the $2 billion the company expects to generate in free cash flow this year, and the $800 million the company had on its balance sheet to begin 2004. That would leave Cendant with an enviable problem: How to spend all of the proceeds.
In past years, Cendant probably would have gone out and bought something big. For years, Mr. Silverman's plan was to buy up businesses to create a company with enough size and diversity that no one shock could pummel it. Indeed, concern about volatility is built into the very core of the company. Mr. Silverman's long-term goal has been to hedge the Cendant portfolio with travel and real-estate companies that reacted differently to different economic situations. In a bad economy, travel suffers but interest rates drop, and the real-estate part of the company prospers. When the economy improves, travel increases while real-estate slides as interest rates jump. That strategy of acquiring and diversifying created the perception in some circles that the company couldn't grow without acquisitions.
These days, having reached sufficient size and diversity and proved it can grow organically, the plan is somewhat different. Instead of getting bigger, the company will likely get smaller, at least in the short term.
"I wouldn't be surprised to see Cendant a [10% to 15%] smaller company a year from today," says Paul Keung, an analyst with CIBC World Markets. CIBC has done banking business with the company, but Mr. Keung doesn't own any of its stock.
By the end of this year, Cendant will have paid down all the debt that is feasible, says Mr. Kessler, the Lehman Brothers analyst.
So other options for spending all that cash include buying back stock and raising the dividend, which Cendant paid for the first time ever in the first quarter. And given Cendant's history, it is likely to continue to acquire businesses that mesh with its travel and real-estate services.
This month, Cendant said it had bought Landal Green Parks, a Holland company that rents vacation properties, for $150 million to bolster its Vacation Rental Group. Cendant paid $100 million for Sotheby's Holdings Inc.'s U.S. real-estate brokerage businesses in February.
Mr. Nelson says the company is placing its emphasis on investing in its Cheap Tickets Web site to make it more competitive with Travelocity and Expedia, but that any acquisitions would most likely cost less than $1 billion.
But for all the talk of complexity, some analysts say some of the stock's discount is due to Mr. Silverman's large pay package and leftover uncertainty from the spectacular misstep in merging with CUC International Inc. in 1997. While Mr. Silverman earned more than $60 million in total compensation last year, Cendant's board makes no apologies for his pay. In April, Cendant tentatively settled a shareholder lawsuit on Mr. Silverman's pay by shortening his contract and eliminating some benefits. Cendant had net income last year of $1.17 billion on revenue of $18.2 billion.
Then there is the cloud of scandal that has hung over the company since its merger with fraud-ridden CUC. The current criminal trial of Cendant's former chairman, Walter A. Forbes, and ex-Vice Chairman E. Kirk Shelton drag the massive fraud back into the news, exactly where Cendant, which has been trying to rebuild its reputation, doesn't want it to be. Messrs. Forbes and Shelton, former executives of CUC, are accused of conspiracy and securities fraud as part of a plan to inflate CUC's revenue before it merged with HFS Inc. to form Cendant.
Once the trial is finished, Cendant will pursue its civil lawsuit seeking hundreds of millions of dollars from CUC auditor Ernst & Young.
"The valuation of the stock -- even though it's had a good run -- is still cheap," Institutional Capital's Mr. Van Tuinen says.
Write to Ryan Chittum at ryan.chittum@wsj.com |
