Cendant's Acquisition Spree
Continues as Analysts Warm
By STEVEN LIPIN and LESLIE SCISM
Staff Reporters of THE WALL STREET JOURNAL
Are Henry Silverman and Walter Forbes, the two impresarios who
created fast-growing Cendant Corp., addicted to deals?
Announcing two multibillion dollar deals in one day is hardly standard
for a public company, let alone a franchising and marketing juggernaut
just formed in December from the $11.4 billion merger of HFS Inc. and
CUC International.
But few dealmakers have done more transactions than Mr. Silverman, a
onetime Wall Street journeyman who built HFS from a small
hotel-franchise company owned by his former partners at the New York
investment firm Blackstone Group.
True to form, Cendant announced plans Monday to acquire American
Bankers Insurance Group for $3.1 billion in stock and cash, or $67 a
share, easily topping a $58-a-share bid of American International
Group. The same day also brought a surprise $1.34 billion pact to
acquire National Parking, a British operator of parking lots and an
auto-roadside-service club. Earlier this year Cendant acquired Jackson
Hewitt, a tax-preparation concern, for about $483 million.
"Everybody was expecting an awful lot of noise, and they're delivering
on that," says Jim Pettit, a Hambrecht & Quist analyst, who, like many
on Wall Street, is bullish on Cendant. "They looked us in the eye and
told us there were going to be a lot of acquisitions."
While rating agencies have begun to warn about the pell-mell pace of
deals -- Standard & Poor's cited the "very aggressive acquisition pace"
in placing Cendant's debt on CreditWatch for posible downgrade --
Wall Street remains dazzled.
Chalk Cendant up as a creature of the 1990s bull market. HFS only
went public at the end of 1992. CUC, built by Cendant's chairman Mr.
Forbes, went public in 1983. Thanks to impressive earnings growth,
both companies had access to capital to grow via acquisitions, either
using their stock or paying with cash. Cendant's pro forma historic
growth rate stands at 28%.
Naysayers who warned Mr. Silverman's HFS was a house of cards
built on an inflated stock price have been wrong, so far. Cendant's
current stock-market value of $36 billion tops that of even Merrill
Lynch, Chrysler or Colgate-Palmolive.
Even now, Cendant's rich stock price of 31 times estimated 1998
earnings of $1.28 a share helps it pay up without hurting earnings, as it
did with its deal to buy American Bankers at 26 times earnings.
Yet Mr. Silverman takes offense at suggestions he built Cendant using
an inflated currency a la WorldCom or Republic Industries, or that
Cendant is boosting its per-share earnings by using stock with a high
price-earnings ratio to buy companies with stocks at lower P/E's.
"Your premise is wrong," he says curtly. "You haven't done your
homework... . I don't think the price of our stock has had any real
relevance" to deal-making activities. He says the American Bankers'
multiple is closer to Cendant's once merger-related expenses are
accounted for. "I know what that game is," he sniffs. "I would love to
be able to play it." Like many CEOs of public companies, he contends
Cendant's stock price is too cheap.
Still, the company does so much dealmaking that, if nothing else, "it's
hard to keep the earnings model up to date, that's for sure," said Craig
Bibb, an analyst at PaineWebber, one of Cendant's many fans on Wall
Street. He says the bull case is that Cendant's price-earnings multiple is
only 1.23 times its expected earnings growth rate, compared to 1.74
times for other consumer stocks.
Until the CUC merger, HFS was a virtual company that had few assets
but owned franchises in hotels, rent-a-cars and real-estate services,
receiving a small slice of revenue for each brand without actually
owning the assets. CUC itself had grown by selling discount-club
memberships for consumer products via direct-marketing, using
acquisitions to add to the company's business lines. Cendant now has
about 67 million members.
With HFS's brands combined with CUC's pioneering strategies to
market membership clubs for everything from travel and shopping to
autos and dining, Cendant has no shortage of Wall Street boosters.
Many are expecting growth rates of 25% annually without any
acquisitions.
Mr. Silverman says he's comfortable with expectations of a 20%-plus
internal growth rate over the next few years. He acknowledges that
more acquisitions would be needed for growth of 25% to 30%. But he
says top management owns too much stock -- about 10% -- to shop
willy-nilly on the company's dime. Cendant "won't do dilutive deals"
that would reduce per-share net, he says.
With its infrastructure and marketing machinery, Cendant says newly
acquired businesses can deliver greater profits than on their own. The
benefits could be anything from lower printing and telecommunications
costs to Cendant's direct-marketing expertise. "None of it is huge, but
when you add it up it's real money," Mr. Silverman says.
But Seth Glickenhaus, whose New York investment firm sold its
Cendant common in favor of a Cendant convertible preferred this year
that pays a 7.5% dividend, calls Mr. Silverman "a very bright man ...
not a guy to bet against." His firm doesn't buy stocks that trade at
Cendant's ultralofty levels, he says, "even good ones."
Paying 30 times earnings "for this kind of high-risk endeavor is
something I would lose sleep over," says Robert Olstein, who heads the
$265 million Olstein Financial Alert Fund in Purchase, N.Y. Of Mr.
Silverman, he says, "You've got to give him credit: He's used Wall
Street's penchant for his stock to build himself a nice company." While
it may have "too high a multiple," he adds, "if it goes down, I would
consider buying."
By many accounts, the acquisition of American Bankers could be one of
Cendant's most challenging. The price of four times book value is one
of the highest ever for an insurance company; most insurers trade at less
than two times book, and the industry's previous recent high acquisition
price was just under three times.
At that price, including about $50 million a year in pretax goodwill
charges and roughly $75 million in pretax interest costs, the deal is
expected to boost per-share net by only a penny or so this year and three
or four cents next year. But Mr. Silverman says Cendant is simply too
big for a deal adding 10% or 20% to earnings.
Cendant managers will have their work cut out to add to American
Bankers earnings through cross-selling and such, at a time of
heightened scrutiny of the high profit margins that typically characterize
its main product-insurance that pays borrowers' debts in the event of
death, disability or unemployment, which consumer groups routinely
criticize as overpriced.
Those sticking by Cendant include Pell, Rudman & Co., a Boston
money manager. "It's a very high multiple stock and it needs to
maintain its very rapid growth rate to maintain its multiple," says
Thomas Riley, one of the firm's portfolio managers. But the company
has "a tremendous amount of momentum" and a business plan that
makes sense, he said. |
