Marriot Vacations (VAC)

Some very quick observations… it looks like the main goals in the spinoff were:

  1. Financial engineering to boost profits.  By adding leverage to the spinoff company, the debtholders (ok, they actually own preferred shares) shoulder taxes that the shareholders would otherwise have to pay.  There is a tax arbitrage here in that the debtholders probably have preferential tax treatment compared to the shareholders.
  2. The parent company wanted to get rid of a company that may have negative growth and/or lumpy earnings.  This allows them to make their company easier to understand and hopefully it will attract a better share price (buyers tend to pay more for situations that are easy to understand and have steady profits).

So if you look at the spinoff carefully, the spinoff has issued preferred shares with a ludicrously high interest rate.  This, in a way, overstates book value at the spinoff.  The spinoff is also obligated to pay royalty payments to the parent… I am guessing that this liability is recorded with a book value of 0.  Again, book value of the spinoff is overstated.

Economically, leveraging the spinoff isn’t necessarily the greatest move since the timeshare business may get killed in a recession and the debt levels may become dangerous.  On the other hand, it could very well be a safe level of leverage.

I like to see spinoff situations where management is actively trying to get investors to sell the spinoff too cheap.  This can create the potential for some very nice gains and I think it will happen to MFC Industial Ltd (NYSE:MIL).  However in the case of Marriot Vacations, management is trying to dump the toxic waste into the spinoff much like the Seahawk/Pride spinoff (Seahawk is now in bankruptcy… though this has a lot to do with the Deepwater Horizon disaster, low natural gas prices, and the low cost of shale gas compared to offshore gas).

Disclosure: I used to own Marriot pre-distribution and sold after the spinoff.  I own neither the parent nor the spinoff.

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