Marriott-Starwood deal is a 'game changer'
16 NOVEMBER 2015 11:05 AM
Marriott International’s $12.2-billion takeover of Starwood Hotels & Resorts marks the creation of a new giant in the hotel sector.
GLOBAL REPORT—After announcing a planned deal to purchase Starwood Hotels & Resorts Worldwide and create what will be far and away the largest hotel company, Marriott International’s CEO Arne Sorenson described that deal is “a transformative event for Marriott.”
Taking most by surprise, amid numerous rumors involving many companies, Marriott International announced Monday morning it will buy Starwood Hotels & Resorts for $12.2 billion. According to a news release, that deal includes $11.9 billion of Marriott International stock, based on the 20-day volume weighted average price of Marriott stock ending on November 13, 2015, and $340 million of cash, based on approximately 170 million fully diluted Starwood shares outstanding at September 30, 2015.
Adam Aron, interim CEO of Starwood, said the size of the deal was important.
“We’re now the world’s largest hotel operator in every chain scale that matters … the best-in-class company. … Today, size matters, but this is much more than just size, it’s about deep management talent, an impressive global presence … and a business culture that derives results through consistent execution,” Aron said.
The deal has major ramifications for the entire industry and on others looking to grow and compete, sources said.
- The merged company is now the largest hotel company. Marriott International’s market capitalization at press time is $18.7 billion, thus the combined company comes in above $30 billion at $30.9 billion;
- In the race to have more than 1 million keys, the combined entity is the sudden winner, with now approximately 1.1 million rooms in more than 5,500 properties;
- The combined company operates 30 brands;
- It joins Marriott’s loyalty program to that of Starwood’s, which, according to Sorenson, was one of the main sources of attractiveness in the whole deal.
Marriott International stock was trading at $72.80 per share as of press time, down 6.7% year to date but up 0.1% for the day. At the same time, Starwood was trading at $70.57, down 12.8% for the year and 5.7% for the day.
Sorenson told analysts on a Monday morning conference call that “one of the things we liked the best (about the deal) was that it does not change our risk or incremental exposure on the downside, but we are adding to the upside … driven by relative revenue lift and the cost synergies we can achieve … in a steady-state market at this cycle and with the (United States) economy enjoying strong fundamentals.”
Bruce W. Duncan, Starwood chairman, told analysts the deal would have had very different ramifications for Starwood shareholders if the company had sold for cash.
Duncan said Starwood shareholders would own about 37% of the combined companies’ stock and that Starwood still expected to offload between $1.5 billion to $2 billion in hotel asset sales within the next two years, thus continuing its asset-light program.
“There were pros and cons in using equity. Cash would have been cheaper, but structured equity allows shareholders to be in on the upside,” Sorenson said.
“This is a game changer. It is now the go-to stock,” Duncan said.
Sorenson, who said the deal’s break-up fee would be $400 million and that closing costs might add another $100 million to $200 million, added that the deal would be earnings before interest, tax, depreciation and amortization “and earnings-accretive from the get-go. The first year will be noisy, but most costs will come off the (profit and loss). … We will try and share a better model of what this merger will look like, certainly by the deal’s close.”
Marriott and Starwood executives would not say if any brands would disappear, noting the companies’ upper to luxury sector brands would continue roughly where they are today, although there would be a careful analysis over the coming months.
They added that they thought the two companies had different structures and that opportunity would come across the whole portfolio.
“Historically, no one has bought and then broken up a portfolio of brands,” Sorenson said.
Sorenson said the merged company will remain managing and franchising hotels and concentrate on free cash flow and cash return to shareholders.
A long conversation
Carl T. Berquist, Marriott’s executive VP and CFO, said that seven months ago when Starwood first underwent an analysis of its strategic options, Marriott was not interested in the merger.
That obviously changed, with one reason given being the relative strength of online travel agencies and that sector’s M&A activity.
“Initially we were not interested, but what happened over those seven months was that we realized what the potential would be with the merger and how compelling it would be if we could do the deal as it has been announced today,” Berquist said.
Sorenson added that the possibility of a merger had been the subject of conversation, but that Marriott executives had not indicated that a deal was imminent, even at its recent owners’ meetings. Sorenson said he expected the news to be positively received by owners.
Marriott executives spent much of the year shoring up their balance sheet for the acquisition, of which $11.9 billion of the total $12.2 billion consideration to be paid comprises Marriott stock. As of 30 September, the company had repurchased 25.1 million shares of its common stock for $1.9 billion, including 9.8 million shares for $702 million during the third quarter alone.
Duncan added that Starwood had spoken to a wide range of suitors but that it has “come out of this seeing Marriott was the best option. It was critical to our long-term growth strategy to join Marriott, rather than do so via a standalone policy … our shareholders will benefit from revenue and cost synergies.”
Duncan also added that the timeshare wing of Starwood, which was sold in October, was not part of the deal or discussions on the deal.
Industry analysts seemed surprised but reacted favorably to the Marriott-Starwood deal, with many wondering what took so long for the deal to materalize.
Russell Kett, chairman of business consultancy firm HVS London, said the takeover of Starwood has been on the blocks since it did not make a permanent replacement for previous CEO Frits van Paasschen.
“Since no replacement has been made, it was ripe for being taking over,” Kett said.
“Marriott can absorb Starwood’s brands, rationalize them where they need to be rationalized, and there are potential savings at head offices and in regional headquarters that ought to be anticipated,” Kett added.
Kett also believes the deal will spark the increased likelihood of additional mergers and acquisition activity.
“The industry does not have real giants, but now it does, and it might provoke other consolidation, for example, (InterContinental Hotels Group), Hilton (Worldwide) and Hyatt (Hotels Corporation), as well as smaller entities,” he said.
AccorHotels is another company that might dip its toes into M&A waters, Kett said, referring to speculation that AccorHotels might be considering a buy of the Fairmont Hotels & Resorts, Raffles Hotels & Resorts and Swissôtel Hotels & Resorts.
Wouter Geerts, travel analyst at Euromonitor International, told HNN that he was surprised, thinking that Hyatt, not Marriott, was the hotel company in advanced talks with Starwood.
That said, he thought Marriott better placed.
“Unlike Hyatt, which value sales are dwarfed by Starwood, Marriott’s value sales almost double those of Starwood. The planned acquisition will make the combined company the uncontested top hotel player,” Geerts said.
Initial reaction to news of a merger was received warmly by owners of Marriott and Starwood properties.
When New Castle Hotels & Resorts President and COO Gerry Chase learned of Marriott’s announced acquisition of Starwood, he was attending the opening of his company’s new Westin property on Jekyll Island in Georgia. With both Marriott and Starwood properties in his company’s portfolio, he said he believes the companies will make a great combination.
“I am sure there will be some challenges to work through, but as a whole, I think it will be a positive,” he said.
Hung Luk, COO of Lam Group, believes the merger will make the company more competitive globally. Luk’s company also has both Marriott and Starwood properties.
“In today’s global market, there are some Chinese firms with huge holdings,” Luk said. “This puts (Marriott and Starwood) in a better global position.”
Bryan Wroten, Patrick Mayock and Sean McCracken contributed to this report.