Analysts talk Marriott’s new brand overlap
Analysts talk Marriott’s new brand overlap
17 NOVEMBER 2015 10:10 AM

Analysts said Marriott International might be forced to re-examine brands amid a merger with Starwood Hotels & Resorts Worldwide.

GLOBAL REPORT—One of the big questions following Monday’s announcement that Marriott International would acquire Starwood Hotels & Resorts Worldwide is how the combined company will deal with its massive portfolio of 30 brands, including some underperforming Starwood brands. 
C. Patrick Scholes, managing director of SunTrust Robinson Humphrey, said one of the biggest opportunities for Marriott will be a revival of the long-lagging Sheraton brand
“This is because Marriotts are known for their superior and consistent service levels and Sheratons are not,” Scholes said. “So guests are willing to pay more to stay at a Marriott.”
So what can Marriott do to improve Sheraton, according to the analysts?
“Bring in their service standards,” Scholes said. “Make some of the Sheratons that need renovations get renovations or be forced to drop out of the system. Convert some of the Sheratons to the Delta brand.”
Robert LaFleur, senior analyst for JMP Securities, said the merged company will be forced to re-examine its brands.
“I think you’ll see some fine tuning of brand definitions,” LaFleur said. “Some brands you may see consolidated or de-emphasized.”
LaFleur said Four Points by Sheraton in particular could have a difficult time surviving the transition.
“It’s hard to see how it fits into the broader Marriott family of brands,” he said.
David Loeb, senior research analyst and managing director for Robert W. Baird & Company, said the combined company will need to focus on finding new ways to differentiate its brands in the many instances they overlap. This is even true for its soft brand collections.
“It gets more complicated when you’re talking about the difference between the Tributes and the Autographs,” he said. “But you can have a Tribute next to an Autograph. In a crowded hotel market, you can have a lot of presence without a brand next door to itself.”
Scale matters
LaFleur said the size of the new company could also give it advantages in marketing and distribution. Assuming no changes are made to its brand portfolio, at least in the short term, it now has a direct booking option that encompasses 30 brands and a comprehensive loyalty program to back it up.
“Now they have practically anything you’d find on an OTA like Expedia,” LaFleur said. “There’s  a real scale game there. You’re seeing lines blurring between hotel companies and distribution platforms.”
“Whether it’s Airbnb, Expedia, the whole cost of acquiring customers or repricing software, size does matter, scale matters,” Loeb said.
LaFleur noted that the competitive advantages of the new company’s size could be attractive to other hotel companies, and it could lead to further consolidation not unlike what was seen with airlines.
“In the airline industry, we’re down from six major carriers to three,” LaFleur said. “I think from a competitive standpoint, three legacy airline carriers and a couple of discount carriers seems like a full competitive landscape. I wouldn’t be surprised to see something similar with hotels.”
As it stands today, LaFleur said Hyatt Hotels Corporation, once rumored as the most likely buyer for Starwood, stands as the biggest loser in the Marriott-Starwood deal, but he thinks Hilton Worldwide Holdings will come through largely unscathed or possibly even boosted by the merger.
“Right now, Hilton is the cleanest out there in large-cap lodging stocks,” LaFleur said. “They’re strategically complete, with no holes in brands to fill. They have nothing broken that needs to be fixed. They had one major competitor in the same position with Marriott, but they’re now taking on Starwood’s challenges. A couple years down the pipe, (Marriott) will be a pretty compelling powerful force in the industry, but I’m not sure Hilton will feel terribly oppressed by that.”
Will the deal close?
When asked if there were any worries that the $12.2-billion, mostly stock proposal deal would close, analysts said no.
Loeb said he expects the deal to breeze through any regulatory hurdles, and he doesn’t expect anything else to block Marriott’s to acquire Starwood.
“I think this one is likely to close. It makes a lot of sense,” he said.
Many analysts seemed to have favorable reactions to the price Marriott agreed to pay for Starwood and the overall structure of the deal.
“Using primarily equity rather than cash, which would have been cheaper for (Marriott), maintains (Marriott’s) investment grade risk profile, particularly important this late in (the) cycle,” UBS analyst Robin Farley said in a statement.
Joseph Greff of J.P. Morgan said, “The premium paid for (Starwood) relative to current levels is modest.” He noted Starwood shareholders will own about 37% of the combined company.
As of press time, Marriott’s shares were trading at $73.48. Starwood’s shares were trading at $72.09. The Baird/STR Hotel Stock Index stood at 3,327.29 as of press time.

1 Comment

  • Anonymous November 17, 2015 8:44 AM

    How could regulators allow for industry consolidation like the airlines? For those companies, achieving scale was necessary for survival whereas the large cap lodging does not require scale for economic viability. If consolidation does occur, OTAs are DEAD; large brands will simply hammer out bargain deals or end distribution agreements with these guys.

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