Timeshare Goes Independent - Analyst Blog

Marriott International Inc. ( MAR ) has completed the spin-off of its Timeshare business into a new publicly traded company. Marriott also announced that the new corporate name of its vacation club business will now be Marriott Vacations Worldwide Corporation. Its shares are being distributed tax-free to Marriott International shareholders.

In mid February, Marriott announced this spin-off as part of its "asset light" strategy. The hived off entity is 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. 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. Pro forma adjustments associated with the spin-off to the unaudited third quarter 2011 balance sheet reflect a $2.5 billion reduction in total assets and a $1.2 billion decline in debt and other liabilities.

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 separated business also has enough inventories to sell over the next few years. The business, which was hit hard during the recession, turned around in 2010. Marriott expects timeshare sales and services to be around $68 to $73 million in the fourth quarter of 2011.

Management estimated that total cash transaction costs related to this development will be around $40 to $50 million for full-year 2011. With this transaction, Marriott expects to receive approximately $325 to $350 million in cash tax benefits through 2015, including $70 to $80 million in 2011 and $120 to $130 million in 2012. However, the transaction does not actually change the company's book tax rate. Marriott expects the split of timeshare business, net of the transaction costs, to contribute roughly 10-11 cents to 2011 earnings.

At present, the company has approximately 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.

Considering the above fundamentals, we believe Marriott's decision to divide its lodging and timeshare business is promising as both have independent growth opportunities. 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.

STARWOOD HOTELS ( HOT ): Free Stock Analysis Report

MARRIOTT INTL-A ( MAR ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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