Marriott International Inc. (MAR) is on track with the spin-off of its Timeshare business into a new publicly traded company. The transaction is expected to complete by year-end 2011. Marriott also announced the new corporate name of its vacation club business will now be Marriott Vacations Worldwide Corporation.
In mid February, Marriott announced this spin-off as a part of its “asset light” strategy. The hived off entity will be a pure-play timeshare company, allowing Marriott to concentrate on its core hotel management and franchise business.
Under the Timeshare business, Marriott develops, operates, markets and sells timeshare interval, fractional ownership as well as residential properties. Revenues are generated primarily by selling fee simple and other forms of timeshare intervals, financing consumer purchases of timesharing intervals and operating the resorts.
Timeshare is a capital intensive business. So this spin-off will also aid Marriott in reformatting its capital structure and taking its business to a new height. At present, the company has 400,000 Timeshare owners and plans to double the number at the earliest. Additionally, the spin-off will give Timeshare more flexibility to expand through acquisitions.
Post split, both companies will have separate board of directors and will focus on opportunities in their respective industries. Marriott will continue to receive franchise fees from Timeshare for Marriott and Ritz-Carlton brands.
We believe Marriott’s decision to divide its lodging and a timeshare business is promising as both have great growth opportunities. At the end of first quarter 2011, the Timeshare segment had $3.2 billion in assets, including $1.4 billion of inventory and nearly $950 million of securitized debt. Hence, the separation of two businesses will lessen Marriot’s debt obligation and favor its core lodging story. It will also provide Marriott with a much higher return on invested capital.
Marriott currently expects to receive a 2% franchise fee based on contract sales plus a flat annual fee of $50 million from the new company. The flat fee would increase periodically by an inflation adjustment.
On the other hand, the soon-to-be-separated business also has enough inventories to sell over the next few years. The business, which has been hit hard during the recession, turned around in 2010. This year, the business is expected to generate a free cash flow of $200 million.
Considering the above fundamentals we believe the decision and timing of the spin-off are appropriate. Marriott, which competes with Starwood Hotels & Resorts Worldwide Inc. (HOT), currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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