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Non-Tech : SPIN-OFFS "secret hiding places of stock market profits" -- Ignore unavailable to you. Want to Upgrade?

To: ron coleman who wrote (89)	2/15/1998 11:07:00 PM
From: Terry Maynard	Respond to of 1185

Here is my latest analysis. The Spinoff is scheduled to take place on March 27 if the needed votes are collected at a special meeting of shareholders on March 17 (St. Pat's Day - Erin Go Braugh!). The transactions will be as follows: -- good Marriott (lodging, senior and tourist) will be spun off by issuring existing shareholders one share of one vote common and one share of 10 vote class A. Subsequent to the spinoff, this company will adopt the name of Marriot International. -- the remaining company Marriot Management Services (facilities management and food services) will acquire Sodexho North American operations for which Sodexho will pay $690 million. Sodhexho (a French company about $5 billion in size) will receive 49% of the ownership (shares) in the company. The name will be changed to Sodexho Marriott Services (SMS). SMS stock will undergo a reverse split 1 for 4. What seems to be occurring, is that the new Marriott International (MI) will shed itself of the SMS business which its execs maintain is undervalued by the market. In so doing MI, will unload about 1.5 billion of debt onto the SMS balance sheet. After all the transactions, MI will be a leaner lodging company which has big expansion plans for the Asia market. The dual stock structure plus greater borrowing capacity should allow MI more flexibility in putting together deals to achieve their expansion goals. Right now Marriot stock is about $73 a share with a P/E of about 29 and Price to Book over 6. IMO, this is a very pricey stock at these levels. After the Spinoff, the price could drop to about $68 a share - based on an estimate of $4 to $6 per SMS share which was stated in the prospectus. Of course it could rise or stay the same too. On the other hand, SMS could start out at about $5 then jump to $20 after the reverse split. I have read many times that reverse splits are not in the best interests of shareholders because the prices have often declined after they have occurred. This one is being done because low prices are perjorative in the eyes of some on Wall Street and some firms or funds are proibited from investing in stocks with prices as low as $5 that SMS would have after the spinoff and merger. High long term debt and negative equity will be problems for SMS comming out of the spinoff/merger. Long term debt will end up being at about 1.2 to 1.4 billion. Close to half is guaranteed by Sodexho. And equity will be a negative $500+. Analysts see SMS cash flow at 2.5 times interest charges, so, this is a plus. My opinion at this point, would be to watch SMS after the spinoff. If the negative effects of the reverse split that I mentioned materialize, the SMS price could go lower than the estimate of $20. SMS will be a $4+ billion dollar company, one of the leaders if not the leader in the North American market. At the end of three years management is estimating that synergy will produce $60 million per year in savings which translates to $1 pershare. (Number of new shares issued will be around 61 million). 10 million shares are being set aside to reward management, so the company is incenting strong stock performance.And this is viewed as a growing market although profits are not as robust as lodging. What bothers me is the negative equity. If there is anyone who could carry this analysis a bit further, I would be greatly inbebted to them. Is this something to be overly concerned about? Why? Why not. By the way the Marriott's will own 10% of SMS. In MI they will own 20%; however, with the merger, Sodexho will acquire 49% of the shares which will bring the Marriots' share to 10%. Please respond. Terry Maynard