As corporate raiders go, Carl Icahn has been the bane of entrenched management, forcing them to improve their businesses, buy out his shares, or spin off assets. These days, he seems to prefer the softer title of "shareholder activist" and is largely seen as responsible for jumpstarting the efforts to mobilize Time Warner (NYSE:TWX) to realize its valuable assets in the interest of shareholders. Management at RJR Nabisco, Texaco (NYSE:CVX), Blockbuster (NYSE:BBI), and Marvel Entertainment (NASDAQ:MVL) have learned there is no real soft side to Icahn.
So undoubtedly, there is some anxiety in the boardroom of Fairmont Hotels & Resorts (NYSE:FHR) now that the financier has set his sights on the 80 or so luxury hotels the company owns or manages in Canada, the U.S., the U.K., the U.A.E., and elsewhere.
When Fairmont was recommended for the Motley Fool Hidden Gems newsletter, analyst Bill Mann suggested that its properties were significantly undervalued, as it has owned many of them for decades and their book value was understated by considerable amounts. Apparently, Carl Icahn concurs with that assessment. He purchased 6.7 million shares, representing a 9.3% stake in the chain, and is calling for the company to maximize value through "strategic alternatives" -- a euphemism usually meaning a sale of the company, or through the sale of various parts of it. The proceeds would then be returned to the shareholders through a special dividend or stock repurchase plan.
These plans should really come as no surprise to Fairmont investors as current management has already been considering many of these initiatives on its own. It previously sold off the Fairmont Express and the Le Chateau Frontenac in 2001, as well as the Kea Lani and Glitter Bay in 2004, resigning each of the properties for long-term management contracts that should continue to generate cash for the company.
The sale of underperforming properties has been masking Fairmont's performance to date. Third-quarter earnings were reported as falling 48% when they were announced last month, but when you strip out the sale of hotels and other non-recurring expenses last year, earnings rose 37%, from $0.35 to $0.48 per share. Still, the stock has taken a beating because of narrowed full-year guidance. It estimated EBITDA -- earnings before interest, taxes, depreciation, and amortization -- in the range of $165 million to $175 million, down from its prior high-end estimate of $185 million. For businesses with large up-front capital expenditures, EBITDA is considered an appropriate measure of a company's cash-generating ability.
Competitor StarwoodHotels & Resorts (NYSE:HOT) has also announced plans to sell off up to $4 billion worth of assets, as has Hilton (NYSE:HLT), which owns or operates some 2,300 properties around the world. Hotels have been fetching premium prices these days -- as high as $146,000 per room, according to consulting firm HVS International. Undoubtedly, it's those demographics and Fairmont's lagging value that has attracted the interest of Carl Icahn.
Management has put up a cool facade to the news and is taking a "go slow" approach to Icahn's announced intentions. Icahn's interest may become a bane or boon to other investors, depending upon whether he allows the company to continue developing its strategy or whether he simply seeks to maximize his own short-term gain.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. Marvel is a Motley Fool Stock Advisor recommendation. The Motley Fool has an ironcladdisclosure policy.
