By ALEXANDRA BERZON And KRIS HUDSON
Marriott International Inc. is spinning off its timeshare business, a one-time booming profit generator for hotel companies that petered out during the recession.
The move will create what amounts to the world’s largest standalone timeshare business, with around $1.5 billion in unsold assets and 400,000 owners, according to Marriott’s chief operating officer, Arne Sorenson. The unit owns 71 properties with 33,000 rooms.
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Arne Sorenson
.Under the plan announced Monday, Marriott’s existing shareholders will own the new company, receiving shares when it is spun out, which is expected to happen by the end of this year. The new company, which has yet to be named, will control the management and planning of the timeshare properties, as well as unsold and under-construction properties.
Marriott’s timeshare business in 2010 had $1.2 billion in revenue, around 10.4% of the company’s total revenue.
The announcement came as Marriott reported a profit of $173 million in the fourth quarter, or 46 cents a share, up 63% from $106 million, or 28 cents a share, in the same quarter a year earlier. Overall revenue rose 8% to $3.6 billion.
Marriott’s revenue per available room, a key industry metric, increased 7.6% in constant dollars. The company said it expects revenue per available room to increase between 6% and 8% in 2011.
The gains come as the hotel industry broadly has shown a faster-than-expected recovery following a deep plunge during the downturn. The upswing has primarily been caused by more business travel.
The timeshare business, however, which relies more on consumer than business travelers, has continued to lag as sales have dwindled and buyers have difficulty qualifying under stricter financing standards.
In the fourth quarter of 2010, Marriott’s timeshare sales fell to $201 million, a $2 million decline from the previous year. The unit’s revenue has dropped around 30% since 2007.
Mr. Sorenson said Marriott shareholders have lost their appetite for the timeshare business. “We’ve never really been interested in walking away from this business,” Mr. Sorenson said in an interview Monday. “But the last few years have been extraordinarily difficult. This recession was harder on the timeshare business than last recessions.”
Analysts say the Marriott spinoff won’t immediately put pressure on two of the other major timeshare players, Starwood Hotels & Resorts Worldwide Inc. and Wyndham Worldwide Inc., to follow suit. However, they may consider such a move if Marriott’s spinoff fares well with investors.
Timeshare sales account for roughly half of Wyndham’s overall sales, so Wyndham is less likely to split its business in that manner than the other two. In comparison, nearly 11% of Starwood’s sales come from timeshares. “Once you have this [spinoff] on a standalone basis, the world will tell us what a timeshare company is worth,” said Robert LaFleur, managing director at Hudson Securities. “We don’t have a pure timeshare company of this scale” already on the market to set a value.
Under Marriott’s plan, the new timeshare company will be a Marriott franchisee by licensing the Marriott names for the timeshare properties. At the helm will be Steve Weisz, the current head of Marriott’s timeshare unit. Its board will include both Debbie Marriott Harrison, the daughter of Marriott chief executive Bill Marriott, and William Shaw, a former Marriott president.
The company will be able to make deals with other hotel companies, Mr. Sorenson said.
The decision, which was made by Marriott’s board on Friday, will carve out a three-decade-old business that began in 1982 when Marriott bought a timeshare property in Hilton Head, South Carolina, and started building timeshare resorts across the country.
For years, the concept, which involved individuals buying permanent rights to stay for a portion of time at a resort, provided dividends. Other hotel companies poured into the business.
Hotel companies continued to invest in the timeshare business even as they divested of most other capital assets. Marriott, for example, in 1992 spun off its real-estate division to create what is now called Host Hotels & Resorts.
Mr. Sorenson said the company tried to partner with outside investors to build timeshare resorts but found that the model of providing management for third-party owners, which is the basis for the hotel business, didn’t work well with timeshares.
Several other hotel and timeshare companies, however, including Hilton Worldwide, are still seeking private investors for new timeshare properties.
As the business declined in recent years, Marriott restructured it using a point system that could be redeemed at any property rather than requiring owners to buy rights at a specific property. Mr. Sorenson said he doesn’t expect the planned change in ownership to affect timeshare owners.
Corrections & Amplifications:
An earlier version of this story said Hilton and other companies were divesting some timeshare assets by seeking private investment. In fact the companies are seeking private investment for new properties.
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