Marriott International and Starwood Hotels & Resorts Worldwide both announced a revised merger agreement that includes $10 billion in Marriott stock and $3.6 billion in cash.
REPORT FROM THE U.S.—Marriott International President and CEO Arne Sorenson said that for a time his company’s deal to acquire Starwood Hotels & Resorts Worldwide seemed “almost too good.”
That was the case when the deal fell apart last week as a consortium led by China-based Anbang Insurance Group swooped in and wooed Starwood with an all-cash offer at a higher value, which Starwood accepted Friday.
Marriott officials were able to win back Starwood over the weekend by increasing their offer from $12.2 billion to $13.6 billion and restructuring the offer to include $3.6 billion in cash and $10 billion in Marriott stock. In a conference call discussing the agreement Monday morning, Sorenson acknowledged that the new deal isn’t as great as the last, but he said it’s still good news for the company in the long run.
“It’s not as good a deal as what we were ready to vote on and close, but it’s still a deal we’re excited about,” he said.
In a news release announcing the amended merger agreement, Bruce Duncan, chairman of Starwood’s board of directors called the possible merged company “an unparalleled platform for global growth in the upscale segment.”
“Throughout this process, our board of directors has remained laser‐focused on maximizing value for Starwood shareholders,” Duncan said in the release, “and Marriott’s revised offer provides the highest value to our shareholders through long‐term upside potential from shared synergies and ownership in one of the world’s most respected companies, as well as significant upfront cash consideration.”
The two companies were originally scheduled to vote on the merger on 28 March before the Anbang consortium deal disrupted Marriott’s plans. With a revised agreement in place, both Marriott and Starwood shareholders are expected to vote on 8 April with hopes of closing in mid-2016.
Sorenson noted during the conference call that the possibility remains for Anbang to come back again with an increased offer for Starwood and once again disrupt the Marriott/Starwood deal, but he refused to comment on what Marriott would do in that circumstance.
There is at least one change made to the deal to address that process, though. Marriott and Starwood officials noted in Monday’s news release announcing the revised agreement that the two companies have increased Starwood’s break-up fee payable to Marriott from $400 million to $450 million. Starwood will also be liable to reimburse Marriott an additional $18 million for costs incurred through the merger process.
The new deal
Marriott’s latest offer represents a substantial increase to the deal first announced in November and carries a dollar value slightly higher than what Starwood was offered by the Anbang consortium.
Not accounting for the value of Interval Leisure Group stock, Marriott’s original deal carried a value of $65.33 per Starwood share. Anbang’s all-cash offer of $78 per share was deemed the “superior proposal” by Starwood officials last week, which fueled Marriott to come back with their latest bid at $79.53 per share.
During the call, Sorenson said the new deal does work in Marriott’s favor in some ways. He said he was glad the company could reduce the stock included in the new offer, even if it means the company is taking on more debt to fund the $3.6 billion in cash included in the deal.
“To some extent, we regretted the high use of equity in the deal announced in November,” he said, noting that cash represents “a cheaper currency for us to use.”
Marriott officials said they expect to shift some of their available capital from planned share repurchases to paying down debt incurred in the Starwood deal. But he said it almost comes out as a wash with the shift to less equity and more cash in their offer.
“If anything, the structure of this deal is like an advance share repurchase,” he said.
The higher price tag helped woo Starwood back to the planned merger with Marriott, but Euromonitor travel analyst Wouter Geerts noted in his comment on the deal Monday that Starwood’s board might be more apt to want to work with Marriott than Anbang.
“Anbang has a track record of making sweeping changes in the companies it acquires, which the Starwood board would probably not look forward to,” Geerts said.
In written comments on the deal Monday, David Loeb, senior hotel research analyst and managing director at Robert W. Baird & Company, said it was smart of Marriott to take on additional debt, even though it pushes the company past its comfort zone.
“We have a positive view of the increased cash component and Marriott's willingness to lever up to get this deal across the finish line,” Loeb wrote. “Leverage is expected to be 3.6x post-closing, above the company's 3.0x-3.25x targeted range, although by year-end 2016, Marriott expects leverage to be back within its targeted range.”
Marriott officials announced some revised projections for the deal, including an increase in the amount saved through corporate synergies from $200 million to $250 million.
Marriott CFO Leeny Oberg said that increase comes from having spent that past six months working with Starwood officials to see how their companies are structured. She said some savings will come from revising how the companies’ international management is structured and from merging corporate operations.
“On the corporate side, we’re adding volume to structures and systems already in place, with functions like finance and human relations,” Oberg said. “A lot of those are fixed costs, and we don’t need to add a lot of people. We went department by department and area by area.”
Still a loyalty play
Sorenson reaffirmed Monday that the loyalty and distribution possibilities of the deal are still one of the primary drivers of merging with Starwood. He said he expects to operate Starwood Preferred Guest and Marriott Rewards in “a parallel way” for the near future, although he hopes to find ways to at least partially integrate the two sooner rather than later.
But over the long term, Sorenson has high hopes for a fully integrated loyalty program for the company’s 30 brands.
“We believe this will generate a hotel loyalty program that truly meets everything a guest wants, and we believe we can position this program so that customers can conclude there’s really no other program that they need to be members of,” Sorenson said. “We think this loyalty ecosystem gives us the best tool we can possibly have to compete in the digital marketplace.”
Brands to grow
Sorenson discussed a handful of Starwood’s brands that he believes represent significant opportunities for growth in a merged company, including Element, W, St. Regis, Aloft and The Luxury Collection.
Sorenson said Element possibly could be repositioned to operate as a competitor for sharing economy platforms like Airbnb and HomeAway.
Sorenson noted that he has been asked about the state of the Sheraton brand since the Marriott/Starwood deal was first announced in November. He said there are some positive signs for that brand, but there is also some fat to trim.
“Some hotels that are holding the brand back have to be deflagged,” he said.
Marriott officials reiterated their growth expectations Monday forecasting worldwide revenue per available room growth from 2% to 4% for the first quarter of 2016 and 3% to 5% for the full year. The company is also expecting an 8% gross (7% net) increase in rooms for the year without factoring in the potential Starwood acquisition. Marriott’s worldwide RevPAR has grown 3.5% year to date through February.
Sorenson said Marriott officials are optimistic they can see similar growth with Starwood’s brands if the merger goes through by capitalizing on the joint selling power of the merged companies.
“We can create a sales force that is stronger and more efficient because of the power of these two platforms,” he said.