Updated from 6:37 a.m. EDTWith its breakup announcement Monday, Cendant ( CD) acknowledged that the key to unlocking its value most likely lies in splitting itself into easier-to-understand businesses. However, investors, who will receive stock in each of four new mini-Cendants next summer, revalued the company lower after it preannounced weak third-quarter results and a slowdown in its consumer travel businesses. Cendant, whose shares have traded mostly between $10 and $25 for the past five years, was down $1.45, or 7.2%, at $18.64. Cendant executives and some Wall Street analysts have said for some time the stock doesn't reflect the full value of the company's myriad businesses. Many investors no longer have an appetite for the headache-inducing task of assessing the value of complex conglomerates. That reality already prompted IAC/Interactive ( IACI) chieftain and serial dealmaker Barry Diller to spin off his online travel businesses as Expedia ( EXPE) in August, only two years after IAC took full control of them in deals aimed at creating a sprawling Internet amalgamation. With Expedia shares falling about 18% since August, the spinoff so far appears to have failed to unlock previously hidden value. New York-based Cendant said its breakup, to be accomplished by three spinoffs next summer, will separate it into independent businesses focusing on real estate, travel services, hotels and car rentals. The company said the market's valuation doesn't reflect its businesses' strong operating and financial performance, but Cendant delivered a weak third-quarter report card Monday and an ominous forecast about its consumer travel businesses. The company said earnings will be 44 cents a share, at the low end of guidance and below the 46-cent consensus from Thomson First Call. Citing weakness in the travel business, it also lowered its year-over-year growth forecast for fourth-quarter earnings before interest, taxes, depreciation and amortization, or EBITDA, to 14% from about 25%. The company plans to release complete results after the closing bell Monday.
"Several of our leisure travel units began to show signs of slowing growth during the third quarter," said CFO Ronald Nelson. "Although some of what we experienced can be directly attributed to the impact of terrorism, devastating hurricanes and higher gasoline prices, we also began to feel the impact of, among other things, the slowdown in the rate of growth currently affecting all online businesses, as well as the ongoing channel shift to supplier sites, demand weakness in certain key markets in the global distribution business, and continued economic weakness in Europe." The company said it had considered moves other than spinoffs, including possible sales, but decided splitting into parts made the most sense from various standpoints, including tax advantages. Cendant said it hasn't yet chosen names for the new companies and that no shareholder approval is necessary. "We concluded that this proposed transaction is the most feasible and the most financially attractive," CEO Henry Silverman said. "It is a tax-efficient approach and does not preclude the other alternatives considered by our board after the separation occurs. This structure removes another layer of complexity, enables the companies to have readily identifiable market comparables and preserves most of the revenue synergies among our business units. And we will seek to preserve other synergies through arms'-length contractual arrangements." The four new companies will be led by teams drawn from Cendant's current senior leadership. Richard A. Smith will be chief executive of Real Estate Services, with Silverman serving as nonexecutive chairman. At Travel Network, Silverman will serve as chairman and chief executive, with Samuel L. Katz as vice chairman and president. Hospitality will be headed by Stephen P. Holmes as chairman and chief executive, while CFO Nelson will lead Vehicle Rental Services as its chairman and chief executive officer.
The real estate company will include the Century 21 and Coldwell Banker brands. The travel services outfit will own the Orbitz Web site, Gullivers group travel business and the Galileo global distribution service. The hotel business will franchise various brands, including Wyndham, Ramada and Days Inn, and the rental car company will have the Avis and Budget brands. "Since mid-2004, we have created three focused public companies -- Jackson Hewitt, PHH Corporation and Wright Express -- through two initial public offerings and one spinoff," Nelson said. "The share price appreciation of each of these companies has significantly outperformed its respective industry groupings, the S&P 500 and Cendant, giving greater credence to our view that the aggregate valuations of the four proposed new companies will exceed that of Cendant today." Cendant said it expects to keep paying its current dividend through the splitup and that all four companies will pay dividends that in the aggregate will approximate the current payout. Cendant suspended its share buyback.