Wyndham's Split Makes Sense, But Save the Champagne

(Bloomberg Gadfly) -- Wyndham Worldwide Corp. has acted on its fear of missing out.

Late Wednesday, the $10.8 billion company confirmed an idea that it has floated before: Creating shareholder value by splitting into two -- a hotel company and a timeshare business. It's not the most original idea on Wall Street and comes on the heels of earlier timeshare spinoffs by Hilton Worldwide Holdings Inc., Marriott International Inc. and Starwood Hotels & Resorts Worldwide LLC. The three created or bolstered Hilton Grand Vacations Inc., Marriott Vacations Worldwide Corp. and ILG Inc., which had already snapped up Hyatt Hotels Corp.'s timeshare arm. 

Investors quickly cheered, sending shares up almost 8 percent after hours before sensibility prevailed. The stock doesn't deserve a sizable lift because shareholders have largely expected the split since April. Back then, Wyndham's longtime chairman and CEO Stephen Holmes proclaimed that Mike Brown, who was newly hired to run the timeshare business, was the right person to take the company to the "next level," noting that the former COO of Hilton Grand Vacations was "heavily involved" in that company's spinoff from Hilton.

Another cause for pause? Wyndham already trades at a blended forward enterprise value to Ebitda multiple of 9.6, which is noticeably below its peer average of 11.5 and franchise rival Choice Hotels International Inc.'s at 13.6, according to Bloomberg data. While its hotel business should trade at a premium to the combined company's current levels, its timeshare arm may well trade at a discount. In fact, it could be valued somewhere in the region of 8 times EV/Ebitda, according to analysts at Nomura Instinet. 

Why? Because it's broadly considered weaker than its key group of rivals, which trade at multiples of 9.4 to 10.1. Each has stronger brand recognition with arguably higher-quality customers and loyalty programs than Wyndham. One metric of its poorer customer quality is that potential default rates are relatively high. The following chart shows that Wyndham is having trouble shaking the issue of potential timeshare defaults. Its projected rate is more than double ILG's 7 percent, according to ILG's investor day presentation:

Still, Wyndham is probably better off divided than together. Its timeshare arm may be able to bolster its valuation over time, potentially through the purchase of another decently sized operator such as Diamond Resorts International, which will be up for grabs when Apollo Global Management LLC inevitably decides to sell in coming years.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.