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Marriott Shares Climb After Timeshare Spinoff Planned

Marriott International Inc., owner of the JW Marriott and Ritz-Carlton brands, rose in New York trading after saying it would spin off its timeshare operations.

The company’s shares climbed 1.1 percent to $41.46 at 4:15 p.m. in New York Stock Exchange composite trading. They earlier rose to $42.78, the highest intraday price since October 2007. The stock has gained 54 percent in the past year.

The spinoff will allow investors to choose between Marriott’s hotel management and property development businesses. It will likely give the hotel company a higher valuation after separating from the slower-growth timeshare business, according to Joseph Greff, an analyst at JPMorgan Chase & Co.

“Marriott’s lodging fee business needs little capital investment, while timeshare needs some level of investment, so this spin could be accretive to free cash flow,” Greff wrote in a research note yesterday. “Our initial take on the spinoff is that this is likely going to be well received by investors.”

The company has pursued an asset-light strategy, divesting most of its hotel real estate and concentrating on operating properties rather than building and owning them. The timeshare business, hurt by a slump in demand during the recession, is focused more on development, said Patrick Scholes, a New York-based analyst with FBR Capital Markets.

‘Investor Pressure’

“There has been investor pressure for many years to sell that business,” he said. “If you want to grow the timeshare business, you have to invest heavily in real estate and development and build things from the ground up. Marriott shareholders aren’t keen on that.”

Stock in the timeshare business, which had revenue of about $1.5 billion last year, will be distributed to Marriott shareholders as a tax-free dividend by the end of this year, the Bethesda, Maryland-based company said yesterday in a statement. The spinoff is likely to trade on the New York Stock Exchange, Marriott said.

The timeshare business, which Marriott started in 1984, has been slow to recover from a decline in consumer spending. In the fourth quarter, Marriott’s timeshare sales fell to $201 million from $203 million a year earlier.

“This had nothing to do with how the timeshare business has been impacted,” Arne Sorenson, Marriott’s president and chief operating officer, said of the planned spinoff in a telephone interview. “It obviously has been impacted by the downturn. Compared to the recession earlier this decade, it was hit harder this time. It’s more about that investors prefer one or the other.”

Separate Boards

Marriott and the new company will have separate boards. J.W. Marriott Jr. will remain chairman and CEO of Marriott International. Stephen Weisz, president of the timeshare business, will become CEO of the new company. William Shaw, who recently announced his retirement as Marriott’s vice chairman, will become chairman of the timeshare company.

After the special dividend, the Marriott family probably will hold about 21 percent of the common stock of each company. The new company is unlikely to pay a quarterly cash dividend or be investment grade “in the near term,” Marriott said.

The timeshare unit accounts for about 13 percent of Marriott’s total revenue. Marriott will continue to receive franchise fees from the timeshare company’s use of the Marriott and Ritz-Carlton brands, the hotelier said.

“The timeshare business is a very capital intensive real estate business,” Scholes said. “The rest is a global management and franchise business with minimal capital expenditures and minimal ownership.”

Marriott yesterday also reported fourth-quarter earnings that beat analysts’ estimates. Net income climbed to $173 million, or 46 cents a share, from $106 million, or 28 cents, a year earlier, the company said. Adjusted earnings, which exclude an $84 million impairment for revenue-management software and other costs, totaled 39 cents a share, more than the 37-cent average estimate in a Bloomberg survey of five analysts.

Revenue climbed to $3.64 billion in the fourth quarter from $3.38 billion a year earlier.

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