FTC Negotiates Settlement To Preserve Competition In Worldwide Market For Timeshare Exchange Services

In settlement of Federal Trade Commission allegations that the proposed acquisition by CUC International, Inc., (CUC) of HFS Incorporated (HFS) would create a virtual monopoly in the worldwide market for full-service timeshare exchange services, the FTC has required the parties to divest one of their timeshare exchange companies to re-establish a viable competitor in the market. The proposed settlement is designed to remedy the anticompetitive effects resulting from CUC's acquisition of HFS, such as higher prices and a reduction in services for customers.

CUC, headquartered in Stamford, Connecticut, is a leading, membership-based consumer services company, providing its members with access to shopping, travel, dining, and vacation exchange services. CUC owns and operates more than 20 services, such as Auto Advantage, Travelers Advantage, and Interval International, Inc. (Interval). Interval, based in Miami, Florida, is the second largest timeshare exchange company in the world, with approximately 35 percent of the market. HFS, of Parsippany, New Jersey, is a leading franchisor of brand-name hotels, residential real estate, and car rental companies, including Ramada, Days Inn, Howard Johnson, Avis, Super 8, and CENTURY 21. HFS, in November 1996, acquired Resort Condominiums International, Inc. (RCI). Based in Indianapolis, Indiana, RCI is the world's largest provider of timeshare vacation exchanges, with approximately 65 percent of the market.

When timeshare owners register with a timeshare exchange, they may choose to vacation during a specific week at the timeshare unit they own, or they may exchange that vacation for a week at a comparable timeshare unit at an exchange-affiliated resort. The ability of timeshare owners to exchange vacation weeks for differing times or at different locations through worldwide exchange networks is a major reason why consumers purchase timeshare interests.

Timeshare owners rely on the exchange service company to process exchanges, label time periods high, mid, or low-season, and grade and rate each property to provide for a fair exchange.

CUC has proposed to acquire all of the voting shares of HFS for approximately $8.7 billion. According to the FTC, this merger would combine the only two worldwide full-service timeshare exchange service companies. New entry into the relevant market would require significant expense because of the difficulty in establishing a worldwide network of timeshare resorts in order to provide services comparable to those offered by Interval and RCI. A new entrant cannot sign up new members unless it already has a substantial membership, and it cannot get a substantial membership if it cannot sign up new members, the FTC said. In fact, it is extremely unlikely that a new entrant not already in the timeshare exchange business could enter successfully.

CUC, through its wholly-owned subsidiary, Interval Holdings, Inc. and HFS, through its wholly-owned subsidiary, RCI, operate their respective timeshare exchange services.

The FTC's complaint detailing the charges in this case alleges that the effects of CUC's acquisition of HFS would be to substantially lessen competition and create a monopoly in the worldwide market for timeshare exchange services in the following ways:

• by eliminating direct actual competition between CUC and HFS;
• by increasing the likelihood that the firm created by the merger of CUC and HFS would unilaterally exercise market power;
• by increasing the likelihood that timeshare resort developers and timeshare owners would be forced to pay higher affiliation and exchange fees; and
• by increasing the likelihood that timeshare exchange service provided to developers and owners would be reduced.

The proposed agreement to settle these allegations, announced today for a 60-day public comment period, would restore the competition that would be lost as a result of the acquisition. Under the proposed settlement, CUC would be required to divest -- within 10 days after its acquisition of HFS -- all of its Interval timeshare exchange business assets to Interval Acquisition Corporation (IAC) -- a new entrant into the timeshare exchange services market controlled by a venture capital firm, Willis Stein & Partners, L.P. If the sale of Interval is not made to the Willis Stein buying group, the parties would be required to divest the RCI timeshare exchange service to a Commission-approved acquirer within six months after the date on which HFS and CUC signed the proposed settlement with the FTC. If CUC does not divest RCI, the Commission may appoint a trustee to do so.

Further, in the event that the FTC decides to reject IAC as an unacceptable buyer of Interval after the public comment period, CUC would have to rescind the divestiture of Interval to IAC and would then have 120 days to divest either Interval or RCI to a Commission-approved acquirer. Pending either of these divestitures, the proposed settlement would require that CUC maintain the viability, marketability, and competitiveness of both Interval and RCI.

If, in fact, CUC divests Interval to IAC, the proposed settlement contains a number of provisions designed to ensure that IAC will be a viable competitor to CUC, including prohibitions on CUC's solicitation of Interval's developer clients that have expiring contracts. CUC would have to allow IAC access to management software designed by a subsidiary of RCI, and CUC would be required to continue to provide Interval with certain services relating to an enhanced membership program.

Finally, the proposed agreement contains a number of recordkeeping and reporting requirements designed to assist the FTC in monitoring compliance with its terms. The Commission vote to accept the proposed agreement for public comment was 4-0.

A summary of the proposed consent agreement will be published in the Federal Register shortly, and will be subject to a 60-day public comment period. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, the consent agreement and an analysis of the agreement to assist the public in commenting are available on the Internet at the FTC’s World Wide Web Site at:http://www.ftc.gov or by calling 202-326-3627. FTC documents are also available from the FTC’s Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington D.C. 20580; 202-326-3128; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC’s NewsPhone recording at 202-326-2710.