In 2000, Fairfield Communities, Inc. was one of the largest timeshare operators in the United States. The company’s resort portfolio consisted of 35 resorts in 12 states and the Bahamas. Of the company’s resorts, 25 were in destinations with popular tourist attractions such as Daytona Beach, Florida and Las Vegas, Nevada, and 10 were in scenic areas. Fairfield sold and financed Vacation Ownership Intervals (VOI) that represented a documented interest in using a fully furnished vacation home of a specific size, location, time of year, and length of stay. Clients generally made an initial payment of 16% to 18% of the purchase price and financed the remaining amount. Approximately 80% of Fairfield clients chose to use the company to finance their VOI purchases for terms of up to seven years and at interest rates of approximately 15% per year. To finance its rapid growth, Fairfield securitized the claims through “sales” to special purpose vehicles (SPEs). The SPE has issued debt securities that are backed by the claims. As permitted by US GAAP, Fairfield used the equity method to account for the SPE instead of consolidating the financial statements of the SPE. Therefore, the SPE debt did not appear directly on Fairfield’s balance sheet. A takeover bid for Carnival Corporation, the world’s largest cruise line, was withdrawn after Carnival’s share price fell 42% following the announcement. In November 2000, Fairfield received an offer from Cendant Corporation to acquire the company for $ 15 per share. Valerie Amphlett, an analyst at the Arbitrage Fund, was asked to examine Fairfield’s recent financial performance, including an analysis of the impact of the company’s accounting treatment of the SPE, to determine whether Fairfield is worth $ 15 per share.
Thunderbird School of Global Management (TB0407-PDF-ENG)
January 01, 2002
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