Cendant Splits Up

I just don’t get Cendant (CD). Everybody loves this stock and I just don’t know why? Am I missing something? It’s like the saki of Wall Street. I know I’m supposed to like it, but I’m sorry. I just don’t.
First there’s the name. It’s one of those modern names that sort of sounds like something, but it’s not. (The worst of these names, of course, are the spin-offs of Ma Bell, and the spin-offs of the spin-offs. I think it was part of Judge Greene’s break-up decision that henceforth all telecom names must be non-descript and wretched. Avaya? Lucent? Verizon?? Think about this: At some point in history there was a meeting that ended with the words, “So we’re all agreed. Agere!”)
The problem with Cendant is that it doesn’t make sense. It never made sense. The idea was to combine HFS and CUC International into a giant cross-marketing dynamo. These always sound good on paper, especially whatever paper press releases are written on, but they never work out. The new conglomermess wants to get a high earnings multiple, so it can use its stock to buy more companies. The cycle repeats until you’re left with some Tyco/Citigroup hydra-headed monster that the market hates. I have to admire Henry Silverman’s determination to try a strategy that has never worked in the past. Not only did it not work this time, Silverman partnered up with a bunch of crooks.
CUC International was cooking their books and they got caught. Getting nailed for accounting fraud back in the 1990s was pretty hard to do. CUC’s former president, Kirk Shelton, got a 10-year prison sentence and has been ordered to pay Cendant $3.27 billion. The judge ordered a payment schedule of $2,000 a month, so Kirk should be all done by about the year 15000. Walter Forbes is due for trial soon.
Now Cendant has completely reversed course. The company wants to be a real estate and travel company, and nothing else. Bravo. At least this is a strategy. It’s not a good one, but now they have a game plan. The problem is that the company is selling off good businesses at the wrong time for too low a price. I really wish I had Henry Silverman in my fantasy football league. Cendant has sold off Jackson Hewitt (JTK), the tax preparer. In January, they sold PHH (PHH), then they sold off Wright Express (WXS). Separately, these stocks have outperformed shares of Cendant. They’re still not done. Henry also wants to sell Market Services.
Cendant has tons of cash, but I still don’t like what they’re doing with it. They’re paying off debt, which is nice but not necessarily a priority. They’re gobbling up other businesses. They’ve snagged Orbitz, Fairfield Communities and the rest of Avis, plus some boring others. They’re also buying back their stock which makes no sense at all. Fortunately, that’s been put off due to the breakup. In short, Cendant is over-investing in real estate at the top of the real estate market. Is anyone there looking at the prices of homebuilding stocks? The sector is off 20% in the last three months.
Cendant is in a quagmire. The stock hasn’t done anything in years. They’ve bought and sold 93 companies in seven years. They can’t be bought out because they’re too big. They can’t spin-off businesses because of the tax basis. So what’s left?
Today we got the answer. Cendant is splitting itself up into four different companies:

In breaking itself up, Cendant will create four companies out of its four main lines of business: real estate, travel, hotels and car rentals. The real-estate company will include brokers Century 21 and Coldwell Banker; the travel business will consist of Cendant’s Orbitz, Galileo and Cheap Tickets brands; the hotel company will include the Ramada, Howard Johnson and Days Inn brands; the car-rental company will have the Avis and Budget businesses. Cendant expects all the new companies to be major players in their industries.

Cendant also guided lower for this quarter and next. Cendant is a great example of a stock where the numbers don’t give you a good idea of what’s happening. I think too many people saw a low multiple and high cash flow and thought there was a bargain there.
I expect to see a lot of articles on Silverman’s “brave vision” for Cendant. In reality, this is a surrender to the market’s vision. It took too long to realize. I wish the Baby Henries well, but I’m still not convinced. Though I have to admit that the new strategy sounds great. On paper.

Posted by on October 24th, 2005 at 1:53 pm


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