Starwood Tumbles After Hotel Group Chief Resigns

The departure raises further management concerns at the hotel and leisure concern.
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Starwood Hotels & Resorts

(HOT)

shares tumbled after the head of Starwood's hotel group departed, raising further leadership questions at the hotel and leisure concern.

Starwood shares dropped 3, or 13%, to 20 15/16, not far above their 52-week low of 19 1/2, on news of the departure of Juergen Bartels. Analysts said Bartels' departure suggests an inability on the part of chairman and chief executive Barry Sternlicht to share power with executives.

The stock closed down 2 3/16 to 21 3/4.

In the last year, the company has also lost significant management experience in Richard Nanula, the former president, and Fred Kleisner, former head of the American operation. "Recently, Sternlicht has not seemed to have a deft hand with top management," said John Rohs, gaming and lodging analyst at

Schroder & Co

. He has a market performer rating on the stock, and his firm hasn't done any underwriting for Starwood.

"His departure is an issue of concern," said Jason Ader, gaming and lodging analyst at

Bear Stearns

. "He was hailed as the man who could integrate acquisitions and improve the brands." Ader rates the company a short-term neutral and long-term buy. His firm hasn't participated in any underwriting for Starwood.

The board of directors has set up a search for a new president and chief operating officer. Brenda Barnes, an outside director of Starwood and former president and chief executive of

Pepsi Cola of North America

, will take over on an interim basis. "The financial community would like to see someone of some stature to come into the COO role and would like to see that person stay," said Rohs.

In contrast, Starwood's earnings were a nonevent. For the third quarter ended Sept. 30, net income fell to $74 million, or 38 cents a share, from $79 million, or 37 cents a share, a year earlier. All numbers are stated on a pro forma basis. That matched the consensus estimate of sell-side analysts polled by

First Call/Thomson Financial

. Revenue rose to $956 million from $884 million a year ago.

The decrease in pro forma net income was primarily related to a $15 million pro forma adjustment to reduce selling, general and administrative costs in the third quarter of 1998 related to prior quarters. Net income was also cut by the interest expense incurred as a result of the company's stock buyback program, though the impact on earnings per share was offset by a reduction in the number of shares outstanding.

The company recorded healthy growth in revenue per available room in North America of 5%, which was better than expected, according to Mark Mutkoski, an analyst with

Deutsche Banc Alex. Brown

. He rates the stock a strong buy and his firm has not done any recent underwriting for the company. Additionally, earnings before interest, taxes, depreciation and amortization from both overseas properties and New York City properties were strong, up 3.6% and 9.1%, respectively.

However, EBITDA margins were soft, increasing only four-tenths of a percentage point to 31.6%. "Our margins were negatively impacted by foreign exchange, ongoing hotel reservations, preopening expenses for the new Ws (hotels) in San Francisco and Seattle, onetime Y2K expenses and most importantly, our continued heavy investment in our Starwood Preferred Guest frequency program," said Sternlicht in a statement.

In a conference call with analysts, he also announced a projected windfall of $4 billion in cash from asset-sale proceeds, including the $3 billion sale of Starwood's

Caesar's Palace

gaming operation to

Park Place Entertainment

(PPE)

and the sale of noncore hotels. The money will be used to pay down debt and buy back stock.