The Timeshare Beat

STARWOOD LOOKING TO ENTER TIMESHARE BUSINESS

Federal Filings Newswires

ISSUER: STARWOOD HOTELS & RESORTS WORLDWIDE INC.
SYMBOL: HOT

July 14, 1999
WASHINGTON (FFBN) -- Starwood Hotels & Resorts Worldwide Inc. plans to increase its presence in the timeshare industry through either an acquisition or a joint venture.

"We've determined that in order to get into the timeshare business in a timely manner, it would be better for us to do it via an acquisition or a joint venture," spokesman Jim Gallagher told Federal Filings Business News.

Although Starwood already has a few timeshares, its presence in the area is a small one, according to Gallagher, and one that contributes little to its bottom line.

The Starwood spokesman declined to comment on which timeshare companies Starwood is currently in negotiations with. However, Gallagher did say that there would be several advantages to acquiring a company.

"You'd be buying talent, you'd be buying expertise in running the business," Gallagher said. "It's a management-intensive activity and it's much easier to buy than to build."

In Starwood's case, Donaldson Lufkin Jenrette analyst Jake Fuller agrees that acquiring a strong management team for timeshare operations would be a plus.

"For Starwood to go out and buy a [timeshare] company, they would be buying management expertise because they don't currently have that in house," Fuller told FFBN. "They would also be buying some resorts and, hopefully, by drawing guests from their reservation systems, they would be able to bring down marketing expenses."

Fuller said that those hotel companies with timeshare operations have, as a percentage of sales, cost-of-sales expenses 15% less than stand-alone timeshare companies. Using Marriott International Inc. (MAR) as an example, the Donaldson Lufkin Jenrette analyst said that with its large reservation systems and its ability to build timeshare resorts near its hotels, the company is able to keep its cost of sales in the range of 30% of sales.

Given a takeover scenario, Fuller said, those decreased marketing expenses would be accretive to the acquirer's earnings.

A timeshare operation gives a hotel company another way to grow, another product to market, Fuller adds, in a sector where new hotel building is slowing somewhat.

"We're clearly at a point in the lodging cycle where you might be better served by looking outside of the traditional hotel arena to find growth," Fuller said. "There's been a lot of building in the hotel sector over the last two to three years; we don't need a lot more hotels out there."

With hotel companies trading at multiples much higher than timeshare companies, the Donaldson Lufkin Jenrette analyst said that Starwood would presumably be able to do a deal that would be accretive. Marriott International is trading at 21.3 times projected 1999 earnings, while Starwood is trading at 18.8 times projected 1999 earnings. By comparison, timeshare companies such as Sunterra Corp. (OWN), trading at 9.1 times, and Fairfield Communities Inc. (FFD), trading at 13.8 times
1999 projected earnings, have relatively low-flying stock prices.

However, Fuller notes that valuing timeshare companies by earnings alone may be misleading and prohibitive to making a deal.

"If you think about what components there are in timeshare earnings, they finance most of their sales and they finance them over
seven years, but they book the revenue up-front. There's a very large non-cash component to earnings," Fuller said.

A valuation based solely on earnings, Fuller argues, offers a price much higher than the company's underlying asset value, which is a composite of the receivables portfolio and sold and unsold inventory, among other things.

"If I was going out to buy a timeshare company," Fuller said. "I wouldn't want to pay significantly above the asset value."

Although Fairfield Communities has a strong management team and was rumored to be a takeout target earlier in the year, Fuller believes that the regional locations of many of its resorts makes it somewhat unattractive to Starwood.

The Donaldson Lufkin Jenrette analyst believes a company like Sunterra might be a more promising acquisition for Starwood.

"Sunterra, a very big company with over 80 resorts worldwide, would make some more sense," Fuller said. "They have better distribution [than Fairfield Communities]. They have resorts in places people want to go to. They have a very strong management team -- they brought in a new team over the last year alone."

- Kevin Guerrero 202.628.7684

07/12/1999