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Cendant splits into four to add value

Cendant Corp, the world's biggest travel and real-estate services company, will split into four parts and said fourth-quarter earnings won't meet previous forecasts.

Cendant's real estate, travel distribution, hospitality and vehicle rental units will each form a publicly traded company, New York-based Cendant said yesterday in a statement. The transaction is expected to close next year and be tax free for Cendant and its shareholders, who will completely own the new companies. Investor approval isn't necessary, Cendant said.

Shares have fallen 9.9 percent this year as chief executive Henry Silverman sold or divested units that didn't fit into its real estate and travel units. That's worse than the 2.7 percent drop in the Standard & Poor's 500 Index.

"The company is substantially undervalued," Thomas McIntyre, who holds 526,000 shares of Cendant, said before the firm made its announcement.

Cendant's market value may rise to US$30 billion based on the US$2 billion in free cash flow generated each year by the company, which now has a market capitalization of US$21.02 billion.

The company cut its fourth-quarter profit outlook and lowered next year's growth forecasts.

"They haven't seen their strategy rewarded in the stock market," said McIntyre, who helps manage US$125 million at Orleans, Massachusetts-based McIntyre, Freedman & Flynn. "The frustration has got to be there."

Cendant shares rose US$0.45 to US$20.09 in New York Stock Exchange trading last Friday.

Third-quarter profit fell 21 percent to US$0.44 a share from US$0.56 a year earlier, Cendant said in the statement. It cut fourth-quarter estimates by US$0.03 to US$0.04 a share to US$0.23 to US$0.26 a share on costs related to the combining of two units.

Analysts in a Thomson survey estimated US$0.46.

Cendant didn't immediately respond to a query about a share sale.

Michael Millman, an analyst with independent stock analysis firm Millman Research Associates in Short Hills, New Jersey, said before the announcement Cendant may be worth US$32 a share in a break up. That's 60 percent more than the current stock price.

"We and our advisers believe the sum of the parts has a value in excess of our current share price,'' Silverman said in the statement.

Silverman, 65, has said the company's real estate and travel units act as a hedge, with demand likely rising for one if it slips for another. The company sold or spun off businesses including an auto-fleet billing unit and a marketing-services arm in the past year.

The program to divest units was completed with the sale of the marketing unit on Oct. 17.

"The stars have aligned," McIntyre said. "Even by their own admission this is the transition year."

The company at the same time has bolstered the two main units through acquisitions, including the Orbitz online travel agency and the purchase of the Wyndham hotel brand.

The company's real estate unit includes the residential brokerages Century 21, Coldwell Banker, ERA and Sotheby's Realty.

Cendant said it expects to pay its US$0.11 quarterly dividend until the new companies are formed. A US$2 billion share buyback target through next year is "no longer operative," it said in the statement.

Names for the new firms haven't been decided yet, the company said, adding it will drop the Cendant name.

Shares of individual Cendant units are gaining in value, McIntyre said. Shares of PHH Corp, a mortgage and fleet management company, have risen 21 percent since the spin off from Cendant in February.

Cendant is undervalued compared to other travel-related companies. The company is trading at a price-earnings ratio of 13.50, according to Bloomberg data. That's less than Marriott International's ratio of about 22 and Expedia Inc's ratio of 16.78.
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