NEW YORK (CNNfn) - Cendant Corp. will pay a record $2.83 billion to disgruntled shareholders who sued the company over allegedly fraudulent accounting policies, it was announced Tuesday.|
The class-action suit, with the nation’s three largest pension funds in the lead, is actually a bit smaller than the $3 billion some analysts had expected. Company officials tried Tuesday to portray the settlement as good news, lifting a cloud that has hung over the stock since April 1998, when the company revealed it would have to restate several years of financial results at a predecessor firm, CUC International Inc.
"For the last 20 months, every business discussion we had would start with, ‘What about a settlement? Is there going to be one? How big is it going to be?’” Henry R. Silverman, Cendant’s chairman, president and chief executive, said in a conference call Tuesday morning. "This is now behind us. We are now like any other company, but hopefully growing a little faster.”
Shareholders will have to wait
But it could take a year or two for shareholders to see any of the settlement, Silverman said. He expects that with 70 different lawyers representing different classes of shareholders, there could be an appeal of the division of the settlement even without an appeal of the total settlement amount.
The class includes shareholders who purchased the stock of Cendant (CD) or its predecessor firm, CUC International Inc., from May 31, 1995, to Aug. 28, 1998. That includes former shareholders of HFS International Inc., who received the new Cendant stock when it merged with CUC in December 1997.
New York-based Cendant operates several prominent franchises, including Century 21, Coldwell Banker and ERA real estate, Avis car rental and the Ramada hotels.
Cendant said it expects to take a $1.8 billion non-cash, after-tax charge in the current quarter, and sees 2000 net income reduced by 12 cents to 16 cents a diluted share due to the settlement. It said it expects insurance to cover some of the cost of the settlement and for tax deductions to cover some of the other costs.
Stock has yet to recover
When the scandal came to light in April 1998, it triggered a huge sell-off in Cendant's stock price, from which the company has not recovered. The stock fell 46 percent on April 16, the first day of trading after the announcement, to 19-1/16 from 35-5/8.
The stock is trading at a relatively low multiple of 15 times estimated 2000 earnings, and Silverman said he’s comfortable with analysts’ projections of strong earnings per share growth next year. Analysts surveyed by First Call expect the company to post income of $1.21 a diluted share before settlement costs next year, about 17 percent growth from this year’s expected results.
Others eyeing assets?
The low multiples and the lack of takeover defenses makes the company an attractive target, said Karen Ficker, analyst at ING Barings.
"There are some very attractive assets many suitors would be interested in,” she said. "Now that the litigation is behind them, I think other people will be keeping an eye on the stock. If Wall Street doesn’t appreciate its fundamentals, I think someone else will.”
In response to a question from Ficker during the conference call, Silverman said Cendant’s board is not averse to considering any fair offers for the company.
"We’ve consistently said we’re a public company. This is not a family business,” he said.
In the suit the nation’s three largest pension funds -- the California Public Employees Retirement System, the New York State Common Retirement Fund and various New York City pension funds -- along with other shareholders alleged the company issued false and misleading statements and allowed company officers to sell Cendant stock prior to the announcement of the accounting problems.
The settlement also included an agreement by the company that outside directors would fill the majority of its board seats within two years, and that its audit, nominating and compensation committees will consist entirely of outside directors. The company also will move to annual election of directors. And shareholder approval will be needed before any stock options for employees are repriced. Silverman said Tuesday that those corporate governance agreements were already the direction the company was moving before the settlement.
Cendant has been selling non-core units, reducing debt and repurchasing shares from stockholders. It said that a previously announced $1 billion share repurchase program may have to be slowed in the fourth quarter due to the settlement.
Other court action continues
A criminal investigation into several former employees is under way.
"Further action lies in the hands of the U.S. attorney and the SEC, each of which we believe is aggressively pursuing the responsible parties,” Silverman said in his statement. "While we will continue to actively cooperate, we expect that these matters will not affect the company or its current officers and directors.”
Cendant also is suing Ernst & Young LLP, CUC’s accounting firm for 1995 through 1997, as are some of the plaintiffs in the case against Cendant. Those suits continue. Half of any settlement Cendant wins from Ernst & Young will go to the plaintiffs in this case.
Cendant stock rose 1-7/16 to 18-5/8 in midday trading Tuesday, after retreating earlier in the day.