<H1>HFS In Talks To Buy Avis</H1><H3>By Lynn Woods</H3><I>Parsippany,. N.J. </I>- HFS Inc., the franchise hotel and real estate company, is currently negotiating to add Avis Inc. to its portfolio of companies.
Neither company would comment on the pending deal, although Avis chairman Joseph Vittoria told employees last week that a company was interested in buying it. Industry executives and analysts speculated that Avis' strong brand value, the success of computer reservation subsidiary WizCom International Ltd. and the potential for expansion into other market segments, such as used cars and auto maintenance, were the key factors in making the car rental industry's number-two player an attractive conquest for HFS.
HFS' chairman and CEO, Henry Silverman, hinted at the appeal of Avis in some general comments he made at the 18th Annual International Hospitality Industry Investment Conference, held last week in New York. "The rental car industry definitely has synergies with the hotel industry," he said. "It's consolidatable, it's a marketing reservation business and there are only a few major players. The industry also has become more interesting because the used-car business is becoming rationalized."
HFS also was rumored to be interested in Thrifty, which has been put on the block by Chrysler, along with its sister company, Dollar. Unlike Avis, which owns 80 percent of its locations, Thrifty is primarily a franchised operation. That, along with its focus on the budget traveler, has obvious parallels with HFS' franchised hotel brands, said Jon LeSage, executive editor of Auto Rental News. "If you look at the synergies, Days Inn and Howard Johnson are more compatible with Thrifty than with Avis," he said. He added that HFS' interest in Thrifty wouldn't necessarily be at odds with its pursuit of Avis because HFS "has bought competitor chains in two different industries"-real estate and hotels.
Under the leadership of Silverman, HFS, which owns nine franchised hotel brands, including Ramada, Days Inn, and Howard Johnson's, and three nationally known franchised real estate firms, has become hugely profitable. "He's earned a reputation for building companies and making them big on Wall Street," said Robert Mandelbaum, director of research at PKF Consulting, which tracks the hotel industry.
HFS' stock has soared from $16 a share in 1992 to about $62, and it trades at 76 times the company's per-share earnings. "His cost of incremental capital is 2 percent," said Bjorn Hanson, hospitality industry chairman at Coopers & Lybrand. "He's able to buy with low-cost funds."
Much of that performance is attributable to Silverman's success in building lodging brands. "His customer is not the guest, it's the franchisee," said Hanson. "It's caused him to define the company differently." HFS has forged "preferred provider plans" with companies like Pizza Hut, which pay a fee to HFS franchisees in exchange for dedicated advertising in the rooms. Avis, added Hanson, is "a company he can reidentify. He can franchise this great brand and discover other ways to make money. He gets two businesses-the car-rental business and a steady flow of used cars."
For Avis' executives and employee stock owners, "this is a very good deal," said Bill Reiter, president and CEO of Reiter Associates Consulting, a car rental consultancy based in Miami. "They'll get a good price for their stock."
"Avis might be looking to change from an ESOP [employee stock ownership plan] to being held by a publicly traded company to generate equity," said William Plamondon, president of Budget Rent A Car Corp. "It's a way for shareholders to get tradeable value for this stock."
LeSage puts it more bluntly: "It's going to be the only way for top-level executives to really get rich," he said, speculating that all ESOP owners and employees would be paid off in the sale and a new legal corporate entity would own Avis.
Besides being employee-owned, Avis represents a departure from other HFS companies in that it is not primarily a franchise operation. "HFS and Avis have two different operating philosophies, which is against what Silverman did in real estate," said Mandelbaum. "All of a sudden, HFS would have direct operational responsibilities-something they don't have in the hotel industry."
Most likely, analysts and industry observers speculated, HFS would transform Avis into a franchise operation-a prospect that alarms Avis' corporate customers.
"My concern is, will franchisees be required to honor the corporate agreement?" said E.J. Hewitt, manager of travel administration at Pilkington Libbey-Owens & Ford Company, an automotive glass manufacturer in Toledo, Ohio, that has used Avis as its preferred car rental vendor for the past eight years. Hewitt said she wondered if special conditions and incentives in the written contract would be accepted, and she was worried that standards on pricing, service and insurance might become an issue as corporate locations became franchisees. By law, corporations can't dictate pricing to franchisees, who are thus not required to honor negotiated corporate rates.
Reiter said one challenge of divvying the corporate entity up into franchisees was Avis' automated management information system, an integrated data processing system that runs the whole company, from fleet buying to profit and loss to forecasting. "To break it up would seem to be a problem unless you put all the location operators into one entity," he said.
But by putting in place new franchise agreements, HFS could drive conformity among Avis franchisees, said Tom Barrett, travel and fleet manager at National Starch and Chemical in Bridgewater, N.J. "The difficulty is having people grandfathered in who were Avis franchisees before," he said. "While existing corporate locations can be driven, the former franchisees can say they don't want to participate."
Avis has franchisees at several major locations, including Los Angeles, Dallas-Fort Worth International Airport and Las Vegas.
Another question was the role General Motors, which has a 29 percent stake in Avis, would play in the deal. Hanson said he believed GM would sell its stake.
Some industry observers regarded possible synergies between Avis and HFS companies with skeptism. One car rental executive said that these synergies could lead to conflicts between Avis and its existing hotel partners. "You can form a stronger alliance, but at what risk?"
Less problematic is bringing Avis' profitable WizCom subsidiary, which processes reservations for dozens of hotel companies and several car rental firms, into the HFS fold.