Street Capitalist: Event Driven Value Investments

Sometimes the break up of a company creates value for shareholders. Cendant provides an instructive case study of this because it was the break up of three very different companies. This made for a more complex spin off but in turn made the possibility of the spin off resulting in undervalued entities much greater.

A brief history, via wikipedia:

In 1996, Cendant purchased Sierra On-Line and Davidson & Associates for $2.2 billion. However, following the fraud debacle the company encountered in 1998, the entire interactive software branch was sold for $1 billion to Havas Interactive, a subsidiary of Vivendi Universal.

In 1998, Cendant Corporation was accused of fraud after their company’s merging of CUC International and HFS Incorporated in 1997. At the time, Vice Chairman E. Kirk Shelton, had inflated the company’s revenue by $500 million over a period of three years. When this report was released to the public, the resulting damage to the company due to market value was approximately $14 billion, with the company’s stock trading from a high of $41 down to nearly $12. At the time, this fiasco was the largest case of accounting fraud in the country’s history. Mr. Shelton is now serving a 10 year prison sentence.
On September 15, 2004, Cendant purchased the Ramada International Hotels & Resorts unit from Marriott International. At the time, Ramada was primarily a franchised brand of 204 hotels operating in 26 countries and territories. Earlier in 2004, Cendant acquired the trademark rights to the Ramada brand in the United States, where there are 819 franchised properties. It also owns the Canadian rights. 
On September 29, 2004, Cendant purchased Orbitz for $1.2 billion.
In early 2005, Cendant purchased ebookers for just under £190 million.

The Break Up

In October of 2005, Cendant announced to shareholders that it would break up into four separate companies. These would fall under the categories of Real Estate, Travel Distribution, Hospitality and Vehicle Rental Companies.
The travel distribution category was bought out right off the bat by the Blackstone Group. Then, shareholders received 1/4 a share of Realogy (Real Estate) and 1/5 a share of Wyndham Worldwide (Hospitality — I have previously owned WYN) and then through a 1:10 split the shares of Cendant were converted to Avis Budget Group (Vehical Rental Companies, trading under the symbol CAR).

Analysis

I wont go very in depth here because this situation has already past and there’s limited upside in trying to invest now. For future opportunities I will provide a more in depth investigation of the company’s financial statements and offer a proper valuation. But here, based on our previous knowledge of spin offs we can anticipate value will be unlocked by breaking Cendant apart. We also know that each of the companies that make up Cendant are well-established with strong brand names. So we would have anticipated shares to rise.
When Warren Buffett mentions investing in companies, he’s always careful to talk about the importance of management. A number of early analysts who viewed the Cendant situation noticed that the CEO would be migrating to Realogy as their CEO. Because of this, it was natural to assume Realogy would become a strong performer.
Realogy is a number of real estate franchise and service companies under one roof.


• Century 21
• Coldwell Banker
• ERA
• Sotheby’s
• The Corcoran Group


In addition, Realogy will also include a settlement group, TRG; a relocation service business, Cartus; and brokerage, NRT. These operations provide Realogy with a set of solid business franchises.
Just how well did Realogy perform? Post breakup, it was possible to acquire Realogy shares at about $24.06 per share in August of 2006. By December Realogy was acquired by Apollo Management for $30 per share. That creates an annualized rate of roughly 83%.

But how did the other companies perform?

With Wyndham, the hospitality company which includes: Wyndham Hotels and Resorts, Ramada, Days Inn, Super 8, TripRewards, RCI, Landal GreenParks, English Country Cottages, Novasol, Wyndham Vacation Resorts (formerly Fairfield Resorts) and WorldMark by Wyndham (formerly Trendwest Resorts).
You could have acquired shares at around $27.50 in mid August. The shares are trading at just about $37.00 a share now, representing a 30% gain

Avid Budget Group, on the other hand post 1:10 split, could have had shares acquired at around $19.00 per towards the end of August. The shares are trading for $29.60, a bit over a 50% return.

What does this teach us?

1. Break ups that result in the creation of entities with strong brand names seem to perform quite well.
2. With the buyout of Realogy and the current buyout rumors for Avis, spinoffs tend to also represent strong private equity candidates, especially with all the money chasing deals today. Another great company that was bought out, post spinning off a subsidiary is First Data Corp.
3. If you study the charts of any of these three stocks, you should notice a slight depression in the price of their shares shortly post spin-off. This is the perfect time to buy, because it’s not caused by the business itself, but because certain institutional shareholders must dump the new shares they receive.
4. It’s very important to follow the management. Look where they’re going, it’s usually a sign of where the best value is.