The Spin On The Spin-Offs At Cendant (CD)

By Chad Langager | July 13, 2006 AAA

In a move to unlock shareholder value, the board of directors of Cendant (CD), recently approved the simultaneous spin-off of the company's real estate services (Realogy) and hospitality services divisions (Wyndham Worldwide).

This is the latest step in the company's plan to split itself up into four separate companies, which was announced in October 2005. Prior to this announced plan, the company had four main operating segments: real estate (Realogy), hotels and timeshares (Wyndham), car rentals (Avis Budget Group), and travel distribution (Travelport).

After all is said and done, Cendant will be split into Realogy, Wyndham Worldwide, Avis Budget Group and Travelport. Late last month, Cendant agreed to the sale of its travel distribution subsidiary, Travelport, to private equity firm The Blackstone Group for $4.3 billion. The proceeds from the deal are going to reduce the debt levels of Realogy and Wyndham.

Shareholders of Cendant will receive one share of Realogy for every four shares of Cendant and one share of Wyndham Worldwide Corporation for every five shares of Cendant. The shares of the spin-offs are expected to begin trading on the NYSE (NYX) under the tickers H (Realogy) and WYN (Wyndham) after the shares have been distributed (July 31).

After the completion of the sale of Travelport and the approved spin-offs, Cendant will continue to trade under the Cendant name until sometime after the company's annual meeting. Several proposals will be voted on at the meeting including a 1-for-10 reverse stock split and the changing of the company's name to the Avis Budget Group.

Upon completion of the split, investors will be left holding three pieces instead of just the one, which begs the question as to, among the parts of the separated company, which is likely to be the best investment. Let's take a look at each of the three publicly traded segments, Realogy, Wyndham, and Cendant (Avis Budget Group).

The Realogy segment is comprised of companies focused on residential and commercial real estate along with title and settlement services. Companies within this segment include Century 21, Coldwell Banker, Sotheby's International Realty, ERA, Cartus and Title Resource Group.

In 2005, the real estate segment provided the largest amount of sales (40%) for Cendant, generating $7.1 billion in revenue, which was a 9% increase compared to 2004. It also generated a healthy amount of earnings; to the tune of $1.2 billion in EBITDA. The strong results were mainly due to the increase in house prices, but were also attributable to an increase in real estate transactions during the period. This segment will also benefit from the sale of Travelport, as a part of the proceeds received are being used to reduce the Realogy segment's debt to around $750 million from $2.3 billion.

Realogy is an interesting company with a solid portfolio of companies and recently strong operations. Due to a large component of it being franchised, it is not a capital intensive business, so it should continue to throw off healthy levels of cash flow. The biggest concern for any investor with this company is the potential for a slowdown in the real estate market, which would lead to both lower housing prices and a reduction in the number of transactions. With the Fed having its sights on the real estate market, investors should be cautious of an investment in Realogy until this threat is reduced.

Wyndham Worldwide holds an extensive portfolio of hotels and timeshare resorts serving a wide range of markets. Some of the operations within this segment include Wyndham Hotels, Wingate Inns, Ramada Worldwide, Days Inns, Super 8 and Howard Johnson, among others. These operations serve the U.S. and international markets across a range of price levels from lower economy (average room rate - $38.34) to upscale (average room rate - $102.46).

In 2005, the hotel side of Wyndham generated sales of $1.5 billion, a 14% increase, which is contributed to the additions of Wyndham Worldwide and Ramada International. While EBITDA declined 2% over the period due to expenses incurred from the combining of the company's vacation exchange and rental businesses, Wyndham continued to generate healthy levels of EBITDA ($449 million). The timeshare side generated $289 million in EBITDA on sales of $1.7 billion, which were increases of 14% and 12%, respectively.

A continued investment in Wyndham is a bet that the economy will continue to remain strong with people continuing to travel. With energy prices continuing to move higher along with interest rates, the continued pressure on both economic growth and consumer wallets is a real threat for Wyndham and the companies within its portfolio.

The last segment is the car rental business, which will remain under the Cendant name until after the annual meeting and completion of the Travelport sale. This has been the second largest revenue generator for Cendant as its $5.3 billion in sales in 2005, represents 29% of the company's overall revenue. This was a 13% increase over 2004 sales as the company has continued to see rental demand increases.

The segment has been feeling pricing pressure though, which has offset the gains in rentals and lead to a 6% reduction in EBITDA on a year-over-year basis. The pressure has come mainly from increased competition within the industry and decreased prices. This segment also doesn't throw off the same amount of earnings from its sales as the other segments mentioned, as EBITDA is 8% of revenue compared to 17% in the Wyndham and 23% in the Realogy segments. If this pricing pressure continues, profit margins will likely continue to be squeezed, which will reduce the overall attractiveness of this business.

In the case of Cendant, there does not appear to me to be a screaming winner out of the companies set to become publicly traded entities. This is mainly due to the current investment environment, which I feel will lead to pressure on consumers and the real estate industry.

If the investing climate starts to improve, such as cooling oil prices and a pause in interest rates, the attractiveness of these companies will be enhanced. In this scenario, I would be likely to look at Realogy and Wyndham, as each generates significant cash flows and have a solid product portfolio -- worthy of further research and due diligence.

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