Boring Portfolio

FelCor Rouses!
Tuesday, March 24, 1998
by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (March 24, 1998) -- The Nasdaq, S&P 500 and Boring Portfolio all had good days on Tuesday, each rising approximately one percent in value, with the Nasdaq and S&P 500 hitting new highs. The Borefolio still has a ways to go to recover from injuries incurred when its investments in Oxford Health Plans (Nasdaq: OXHP) and Green Tree Financial (NYSE: GNT) went sour last fall. We'll get there.

One major growth engine for the Borefolio has been our investment in networking leader Cisco Systems (Nasdaq: CSCO). As big as it has become -- with well over $8 billion in sales expected for the fiscal year ending in July -- Cisco continues to adapt itself to rapidly changing customer needs and technology advances faster than many younger companies one-tenth its size.

Indeed, one way Cisco adapts so rapidly is by buying many younger companies one-tenth its size.

Cisco chief executive John Chambers said today that his company plans to make about 15 acquisitions this calendar year, with an increasing number of the transactions focused on firms that are involved in technology that facilitates the convergence of video, voice, and data communications. Chambers said the acquisitions would mainly be small, non-public companies with a strong engineering focus.

According to Reuters, Chambers was in Sydney, Australia, to meet customers and see Australian prime minister John Howard.

Chambers underscored Cisco's strategic focus on the broad communications market by saying that he expected perhaps as much as half of the company's revenue could come directly or indirectly from service providers by the year 2001, "If we are successful."

Cisco stock surged $3 1/16 to a bid of $67 3/4 in heavy trading.

When we purchased 200 shares of FelCor Suite Hotels (NYSE: FCH) in November, my partner Mark Weaver and I were expecting a slow but steady return on that investment. So far, the share price has snoozed along in the mid-thirties, within a few dollars one way or the other of our purchase price. Of course, the annual dividend -- currently a bit over 6% -- quietly accumulates while the stock naps.

FelCor's alarm clock rang loudly this morning. The company announced that it would be buying 109 hotels from Bristol Hotel (NYSE: BH), the world's largest owner of Holiday Inns (mostly Crown Plazas), in exchange for $1.2 billion in stock and the assumption of $700 million of debt.

As a real estate investment trust, or REIT, FelCor can own but not directly manage its hotels. Bristol will therefore spin off the hotel operations side of its business as a new public company, Bristol Hotels & Resorts Inc.

Then, each Bristol share will be swapped for 0.685 share of FelCor, for a total of 31.7 million FelCor shares. When the transaction is completed, "old" FelCor shareholders like us will own about 60% of the "new" FelCor, and "old" Bristol shareholders will own about 40%.

The "new" FelCor will then own 184 hotels, with more than 46,000 rooms and will have a market capitalization of more than $4 billion, making it the largest "non-paired" hotel REIT. The new Bristol will, in turn, operate the hotels for FelCor.

In an interview with Reuters, FelCor chief executive Thomas Corcoran said that he expects the deal to boost FelCor's 1998 earnings "by four to five percent above the $3.81 per share First Call consensus estimate."

Why the stock dipped $1/2 to $35 5/8 today is something I can't begin to account for -- although stocks of acquiring companies often react negatively in the short term to news of a merger.

We'll follow up with FelCor's management ourselves to gain a fuller understanding of the deal. Speaking only for myself, however, this looks like terrific news.

FoolWatch -- It's what's going on at the Fool today.

Stock  Change    Bid 
 ANDW    ---    20.31 
 CGO   +  1/16  31.75 
 BGP   +  1/16  34.13 
 CSL   +  7/8   48.44 
 CSCO  +3 1/16  67.75 
 FCH   -  1/2   35.63 
                   Day   Month    Year  History 
         BORING   +0.91%  -0.26%   0.26%  26.15% 
         S&P:     +0.92%   5.37%  13.93%  77.87% 
         NASDAQ:  +1.11%   2.37%  15.41%  74.11% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     34.13   203.17% 
   6/26/96  150 Cisco Syst    35.93     67.75    88.54% 
   8/13/96  200 Carlisle C    26.32     48.44    84.00% 
    3/5/97  150 Atlas Air     23.06     31.75    37.69% 
   11/6/97  200 FelCor Sui    37.59     35.63    -5.23% 
   1/21/98  200 Andrew Cor    26.09     20.31   -22.14% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13650.00  $9147.51 
   6/26/96  150 Cisco Syst  5389.99  10162.50  $4772.51 
   8/13/96  200 Carlisle C  5264.99   9687.50  $4422.51 
    3/5/97  150 Atlas Air   3458.74   4762.50  $1303.76 
   11/6/97  200 FelCor Sui  7518.00   7125.00  -$393.00 
   1/21/98  200 Andrew Cor  5218.00   4062.50 -$1155.50 
                              CASH  $13625.51 
                             TOTAL  $63075.51