NEWS ANALYSIS : HFS-Avis Deal Would Reflect New Ways to Reach Customers

Welcome to the ethereal economy.

HFS Inc., a company that owns hotel and realty franchises, was reported Friday to be close to buying Avis Inc., the car rental company, for $800 million. It is a deal that would reflect a new economy in which physical assets matter less than information on--and access to--customers.

HFS and Avis were not available for comment on the proposed deal, which would unite the second-largest car rental chain with such HFS holdings as the Ramada Inn, Days Inn and Super 8 hotel and motel chains; and the Century 21 and Coldwell Banker real estate brokerages.

But HFS Chairman Henry R. Silverman doesn’t want Avis’ massive fleet of cars and probably doesn’t want to manage Avis’ 12,800 employees--who own most of the company. GeneralMotors owns 29% of Avis and was reported to be negotiating with HFS, although GM also had no comment.

The physical assets and operations of Avis would be transferred to an independent trust if the deal goes through, analysts speculated. That was how HFS dealt with Coldwell Banker’s company-owned real estate offices after it purchased the franchise in May.

What HFS really wants at Avis is its Wizard reservation system, which can provide access to customers at 4,800 locations in 140 countries. Silverman’s aim is to exploit those customer connections to sell more goods and services--tickets to Disney resorts, for example, or bookings at Ramada hotels or AT&T; long-distance services.

HFS charges Disney, AT&T; and others for access to its franchise customers. For example, a homeowner who bought through a Century 21 broker could get a discount on AT&T; phone service or tickets to Disneyland. Last year, it took in $21 million in “preferred vendor fees” for such access, a spokeswoman said.

Meanwhile, the great bulk of HFS revenue, $361 million, came from franchise fees, which it collects for allowing independent hotel owners and real estate brokers to use names such as Ramada and Century 21.

Silverman, 55, a financier, founded HFS five years ago with just that idea--building a cross-marketing network among franchises. The company has grown by acquisitions from a $5-million loss in 1991 to $80 million in net profit last year.

But its stock price has grown exponentially--from $4 a share to $70 at the close of trading Friday. Thus HFS, a company that earned 73 cents a share last year, now trades at 81 times earnings--an extremely high ratio. Its total market value is an eye-popping $7 billion.

“Obviously the stock price is crazy, but it reflects the market’s enthusiasm for Silverman’s insight,” says Barry Libert, a consultant on finance and asset values for Arthur Andersen.

That insight, Libert explains, is that ownership of the reservation system that brings guests to a hotel is more valuable than owning the hotel itself. As an investment banker in the 1980s, Silverman worked for a firm that owned the Days Inn chain.

“But he realized that access to customers had more potential,” says Libert. “He could talk to them, find out what else they wanted and be able to serve them. What a concept!”

The idea has been tried before. In the 1980s, United Airlines bought Hertz car rentals and Westin Hotels, renamed itself Allegis Corp. and tried to benefit from anticipated synergies. They never materialized and United, Hertz and Westin are all separately owned today.

But the technology of computer networking has advanced since the mid-’80s, allowing HFS to mount a more sophisticated marketing system. And professional investors bidding up HFS stock are clearly looking ahead to still greater possibilities on the Internet.

However, those possibilities remain a ways off. Meanwhile, if HFS’ purchase of Avis does go through, it could face a challenge in the attitudes of the car rental company’s employee owners, known for their enthusiasm and congeniality.

Will they be as motivated working for a cross-marketing franchiser as they are in an employee-owned company led by a cheerleading chairman, Joseph Vittoria?

Possibly they would be. “Employees will be incentivized because they can earn commissions for selling car rental customers on other services,” says Libert.

But would impatient customers at car rental counters appreciate being constantly pitched for other goods and services?

So questions remain about a buyout of Avis that could be announced on Monday.

But the market value of HFS, which surged $4 a share on Friday, testifies loudly to the stock market’s enthusiasm--often a mania at present--for ideas that would produce money from thin air--from access to customers rather than ownership of physical assets.