Originally created 01/29/97

HFS knits network of franchises for a mobile society

PARSIPPANY, N.J. - You're moving to a new job, so you contact a Century 21 agent to find a new home, rent an Avis car and reserve rooms at Ramada Inns along your route.

Every step along the way, HFS Inc. makes a buck.

In fact, it might be difficult to pull off such a move without dealing with at least one of the company's travel and relocation services. While 7-year-old HFS - founded as Hospitality Franchise Systems Inc. - is not a household name and owns few physical properties, the brand names it franchises are familiar faces along America's roadways.

Like a kid with a fistful of Monopoly dollars and unlimited dice rolls, HFS has strung together $3.9 billion in acquisitions in a quest to offer one-stop shopping for home buyers, vacationers and business travelers.

The growth has been rapid - perhaps too rapid in the eyes of some investors, who have bid HFS' stock down to the mid-$60s from its 1996 high of $79 - but HFS president John Snodgrass insists it's been controlled.

"People may say HFS has been on a buying program that's been very aggressive, but we've looked at far more deals that we've turned down than we've actually acquired," Mr. Snodgrass said.

"I think that we are a company that is very opportunistic," finding deals that fit strategically with its other businesses, Snodgrass said.

In 1996, HFS added to its family Coldwell Banker, the world's second-largest real estate brokerage system; Avis, the world's second-biggest car rental company; and Resort Condominiums International Inc., the world's largest provider of timeshare exchange programs.

It is now the world's largest franchiser of hotels - 5,300 Howard Johnson, Days Inn, Ramada, Knights Inn, Park Inn, Ramada, Super 8, Travelodge and Villager Lodge inns with more than 485,000 rooms, about 14 percent of the U.S. lodging market.

HFS is also the biggest franchiser of residential real estate brokerages, with three of the nation's top four: Century 21, Coldwell Banker and ERA. And it's expected to close a $1.7 billion deal in March for PHH Inc., which runs a corporate relocation service, has its own mortgage business and is one of the nation's largest corporate fleet managers.

Not too shabby for a company that has grown from 50 employees to 30,000 in just seven years and seen its revenues rise from $51 million in 1990 to $799 million in 1996. HFS said Monday it earned nearly $170 million last year, an increase of 113 percent of nearly $80 million in 1995.

It went public in 1992 and was added to Standard & Poor's 500-stock index in August.

"I think it's a very focused, very driven management team," said Joseph Buckley, a Bear Stearns & Co. analyst who follows the Parsippany-based company. "I think they have a very sound understanding of the franchise business and how that can be applied across industries."

But some analysts are concerned that the company may be trying to do too much too quickly and risks becoming unwieldy, Mr. Buckley said. That caution is reflected in the current stock price.

"I think there will always be skeptics and there will always be fans," Mr. Snodgrass said. "Sometimes you have to just operate and manage and prove to people that what they were skeptical about is unfounded."

Chief financial officer Michael P. Monaco notes that the value of HFS' stock is about where it was before the Avis deal was announced last summer. The day the PHH deal was announced, PHH's stock soared $16.75, while HFS' fell $1.25.

"Basically what that says is the marketplace is not giving us any credit or very little credit for the transactions that we brought in the door, so I think we're a show-me stock at this phase," Mr. Monaco said.

"Once the dynamics start to (show) in terms of performance, I think the market can better appreciate what we're all about," he said.

Chairman and CEO Henry R. Silverman founded Hospitality Franchise Systems Inc. in 1990 with the $195 million purchase of the Howard Johnson and domestic Ramada franchise systems.

It was then part of The Blackstone Group, of which Silverman was a general partner. Blackstone sold its stake in HFS in 1993 and the company has continued to flourish under Silverman.

"Henry's got a unique mix of ability to have the vision and to execute," Monaco said. "You can have the greatest strategy in the world, but if you can't execute it it's not worth a plug nickel."

Hotels remained HFS' core business until 1995 when it bought Century 21, the world's largest residential real estate brokerage system.

The company's strategy became clearer last year when it bought car rental and timeshare companies and announced plans to acquire the corporate relocation business - all connected to our society's high mobility.

"We have acquired a lot of different companies in a lot of different industries and this year we're focusing very heavily on achieving a lot of cross-utilization," Snodgrass said. "The customers are generally the same."

With a corporate relocation business, HFS hopes to steer business to its real estate franchises. With PHH, it will be able to grab a piece of the mortgage industry.

Silverman noted that in 1995, people buying homes through HFS real estate franchises took out $80 billion in mortgages, but "we, HFS, participated in a big fat zero."

The concept of businesses crossing industries is nothing new; HFS' twist is that it chooses to be a franchiser rather than an operator. The company charges a fee to franchisees and gets a percentage of sales revenue in return for national marketing, support and reservation systems.

And entrepreneurs keep flocking to the Days Inns and the Century 21s.

"They're definitely on the cutting edge," said Terrian Barnes of the International Franchising Association, a Washington, D.C.based trade organization. "These are definitely areas franchises are interested in."

Franchises already account for one out of every 12 business units in the United States and 40 percent of retail sales, Ms. Barnes said.

"Everybody wishes they have their own business but franchising really makes it possible to make that transition," she said.


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