Description

VVI has steadily rationalized its portfolio of businesses since the separation from Dial and now two reportable segments remain: payment services and convention and event services (CES). The faster growth, higher and expanding margins of the payment services business are positively shifting the Company’s business mix and it appears that a stand-alone payment services business is the goal. This will likely be achieved through the ultimate sale or spin off of the convention and events services business with proceeds used to better capitalize the payment services business such that growth objectives can be met while retaining and enhancing appropriate credit rating for this business.

The timing of such an event will be determined in part by the pace of margin restoration in CES which collapsed due to a combination of contract mis-pricing and expense issues and the economy. The CEO Bob Bohanon was adamant that these issues are being addressed and the margin will traject back towards the historic 9-10% range. A slower than expected turn in CES remains a possibility, particularly in the face of the economic slowdown, but strong momentum in payment services, significant share repurchase capacity, and the fact that the payment services segment is worth more than the current stock price should mitigate this risk.

With $200 MM of operating income growing at a double digit pace, the payment services business at VVI is clearly worth more than the current market cap. Despite its recent difficulties, CES is a solid business. Revenue is visible and recurring with good cash flow. Assuming CES doesn’t deteriorate materially from current levels, the stock should be well supported in the low $ 20s, particularly as the Company has historically been a buyer of its stock at such levels.

Payment services business consists of Travelers Express(bank checks and money orders) and Moneygram(wire transfers). Growth is being driven by growth in locations/agents for money order and wire transfer services and the signing of new bank customers for bank check services as more and more banks outsource this. The international segment of the wire transfer business is growing, and should grow, at a very rapid rate as immigration grows strongly and the Company identifies new ‘corridors’. Margins are expanding as more payment services volumes are driven over a relatively fixed cost base and as more and more locations/agents provide both money order and wire services.(At present, just 10% do both). Meanwhile, 60% of bank checks are still handled internally but the trend is very much toward outsourcing this – also a big opportunity for VVI.

CES consists of GES Exposition and Exhibits Group/Giltspur. GES is a subcontractor for trade show managers. Revenue is visible and predictable as space typically purchased well in advance and rarely cancelled. Industry growth has been 5 – 7% and has regularly grown even in recession albeit at a much slower rate(0 – 2%). GES is 60% of CES. Exhibits Group(40%) builds and refurbishes trade show exhibits. In periods of slowdown, there is some tendency for clients to favor refurbishment over new build creating some drag on revenue and margin. In addition to the expense issues (concentrated in GES), this may be occurring now. Thus, lower revenue growth and progress on margin restoration is a distinct possibility.

Unless one believes Sept. 11th means no conventions/events going forward, the CEO has opined that in a 'normal' environment it is a $900 MM business that will reachieve 10% margins.

Looking out to 2003, the payment service business will generate income of $ 1.50 per share. Assuming CES revenues are flat at $775 MM and operating margins improve to 7.5% implies earnings power of nearly $2.00. A blended multiple of 15 times would imply upside to only $30, yet we believe once CES is “fixed” the asset value is higher for the company as two separate entities. Management’s history of asset disposition suggest a split of the company is feasible and beneficial to shareholders.

Conclusion: Downside $21 Upside Mid $30’s.

Catalyst