On November 16 2015, Marriott and Starwood agreed to an acquisition transaction valued at $12.2bn that will create the world’s largest hotel company so far.
Drivers of the deal
Marriott International (MAR) lining up a takeover bid for Starwood hotels and Resorts (HOT) caught everyone by surprise since Marriott did not take part in the initial offer. The combination of these two companies would create the number one hotel company globally. The deal represents one of the biggest in the industry since the acquisition of Hilton by Blackstone, which was valued at $26bn.
The features of the deal clearly shows how relevant scale is to succeed in the hotel business. The industry’s high fixed – to – variable costs ratio prompts companies to exploit economies of scale. A merger is a useful tool to capitalise on unutilized capacity, if any. The competitive environment poses constant and ever – growing threats such as Airbnb, which has established its foothold in 150 countries with more than 640,000 hosts and 50m users around the globe.
The combined company will have the largest high-quality, internationally recognized brand portfolio in the industry operating or franchising more than 5,500 hotels with 1.1m rooms worldwide. Moreover, the deal would enhance Marriott’s position in emerging markets and would enable a broader customer reach.
The transaction brings together Marriot’s strong presence in the US high – end hotel sector as measured by 10% market share by number of rooms, its multi – channel central reservation system and Starwood’s leading lifestyle brands and international footprint, with an impressive 78% of its core business line that represented growth outside North America.
However, the deal has triggered growing concerns regarding the future of Starwood’s loyalty program known as “Starwood Preferred Guest”. Most clients fear that the merger of the two hotel companies would mean the end of the prestigious Starwood points giving place to a new, less generous and user-rewarding loyalty program.
This transaction offers substantial economies of scale as well as significant synergies. Marriott expects to save $200m annually thanks to cost synergies by leveraging general, administrative and operating costs. This would provide more cash to invest in R&D and technology, a must to win the biggest turf in its fiercely competitive industry.
Transaction Terms and Structure
The $12.2bn deal saw Marriott as the truly surprise winner of the takeover bid launched by Starwood. After competing with Hyatt Hotels Corp., Marriott managed to propose an initial bid for $71.9904 per share, a 4% discount with respect to November 13 Starwood’s adjusted closing price of $74.99 per share. The terms of the final deal spoke for a cash component of $2 per share and a stock component of 0.92 Marriott shares for Starwood share, thus resulting in a bid of $72.08 per share. Furthermore, Starwood shareholders would also receive an additional $7.80 per Starwood share following the spin – off of Starwood’s timeshare business, Vistana, and its subsequent sale to Interval Leisure Group for a total approximate value of $1.3bn. Therefore, the final price per share agreed to in this transaction amounts to $79.88 per share. As of November 16, Starwood’s price per share plunged 3.4% to $72.45 (still above the deal price) while Marriott’s surged 2.4% to $74.49.
It is worth pointing out that there was no remarkable difference between the takeover bids proposed by Marriott and Hyatt Hotels. However, as firmly stated by Starwood CEO Adam Aron, the strategic goal of the transaction was to obtain a greater number of shares. At least for the time being cash did not represent a necessity for the company. Therefore, Starwood’s shareholders preferred not to engage in any transaction with Hyatt Hotels, controlled for the 75% by the Pritzker family. Eager to finalise the deal, Hyatt Hotels was willing to alter its ownership structure by eliminating the special shares of the family for a specified time period. Notwithstanding this proposal, Starwood ended up striking a deal with Marriott in the light of its wider brand base and greater number of price points.
Another relevant aspect of the transaction involves the payment of a $400m break – up fee in case either one of the parties entered an alternative agreement According to some analysts, Marriott’s offer was clearly undervaluing Starwood, whose fair value instead would amount to more than $75 a share based on its earnings forecasts.
As far as the Board of Directors of the combined entity, Marriott’s former CEO Arne M. Sorenson will be the CEO of the combined company and the new company will increase its board to 14 members by adding three executives from Starwood.
The transaction is to be completed by mid-2016 but meanwhile Starwood CEO still leaves open the auction for other more favourable offers.
Lazard and Citigroup acted as financial advisors for Starwood, while Deutsche Bank advised Marriott. Swaine & Moore and Cravath served as legal counsels for Starwood and Gibson, Dunn & Crutcher backed Marriott.
On March 21, 2016, Marriott proposed a sweetened bid for Starwood because rumor had it that another player would have soon waged a bidding war. After the amendment of the deal, Marriott suffered a 6.18% decline in its stock price (from 73.16$ a share on March 18 to 68.64$ a share on March 24). This was due to the presence of its rival that on March 26 made a non – binding offer of $81 a share, or $14bn, from a business group led by China’s Anbang Insurance Group Co and supervised by the private equity Primavera Capital Group and the private investment firm J.C. Flowers & Co.
This bid can be justified in the light of China’s buying spree and true M&A appetite. This trend is going to last for this year reflecting Chinese companies’ desire to expand and diversify their portfolios abroad. One of the “commanding heights” in this respect is doubtlessly the hotel industry. It is recently less volatile than the technology industry and it appeals to a broad range of different investors. The odds are that Anbang launched this bid to secure a foreign investment as a currency hedge against the devaluation of the renminbi.
Anbang is surely not as transparent as Marriott is. Analysts do not know pretty much what its business is about but they are fully aware of what it has bought up to now. Anbang has been famous for its interest in hotel companies since its acquisition of Waldorf Astoria for $1.95bn on October 6, 2014. However, its opaque financial position led Starwood to negotiate for a higher break – up fee to account for the increased risk.
Since Anbang came along with its last all – cash offer of $82.75 a share, Marriott was forced to bump up its sweetened bid to $79.53 in cash and stock.
If Marriott further raised its offer, the transaction would prove to be earnings dilutive for fiscal years 2017 and 2018 and shareholders probably would not approve the deal. The different characteristics of the two offers reflect the companies’ goals. Marriott went for a binding cash – and – stock deal whereas Anbang chose a nonbinding all – cash offer. It is apparent that the luxurious hospitality company aims at creating greater stockholder value in the medium – to long – run while the opaque Chinese business cares about investments diversification and short – term earnings.
Starwood’s shareholders did not have enough time to think about the rivals’ proposals since Anbang unexpectedly withdrew from the deal on March 31. Starwood’s shares dropped 4.1% to $80.05 a share and Marriott’s decreased 4.9% to $67.69 a share. Primavera Capital Group suggested that it did not want to drag out the bidding war any longer. However, the most likely motivations for its act are either that Anbang could not invest abroad more than 15% of its total assets due to regulatory issues or that it could not prove to have the capital to back up its offer.
Either case, Anbang’s withdrawal paved the way for a revival of the Marriott – Starwood deal.
Industry Overview
The hotel sector can be seen as an independent business unit when compared to the four main real estate sectors (apartments, industrial facilities, office buildings, and retail shopping centers). This is primarily due to the fact that it mixes the traditional operating business with the others pertaining to the real estate. Another important aspect in this industry is the importance of branding. A hotel’s brand (or “flag”) could convey various meanings to potential guests, including the consistency, quality, or type of experience. It is this intangible asset to play a vital role in M&A transactions regarding the hotel industry.
Following the terrorist attacks of September 11, 2001, and the ensuing recessionary period in the United States, the U.S. hotel sector suffered from sluggish demand and, accordingly, sector market transactions plunged ridiculously.
However, hotels became very popular with real estate investors between 2003 and 2007, as investors sought to capitalise on the cyclical upturn in the hotel sector and the favorable credit environment. Hotel acquisitions during the height of the market, from 2005 to 2007, totaled nearly $100bn and included several multibillion-dollar acquisitions of public hotel real estate investment trusts (REITs) and other portfolios.
By the end of 2007, the market environment for hotels had changed dramatically. A collapse in the market for subprime residential mortgages started what soon became a truly global credit crunch. Similar to the previous cyclical downturn, hotel performance deteriorated as demand from leisure and business travellers rapidly declined.
However, during past years the market reacted in order to stabilise supply-and-demand dynamics: significantly lower valuations began to draw the attention of opportunistic real estate investors, especially traded and non-traded REITs, as well as large private equity companies.
Demand seemed to have bottomed out and was showing signs of possible revival. In the second quarter of 2015, STR Global forecasted that U.S. hotel industry revenues was going to increase by an average of 5.7% each of the next seven quarters.
Market research firm Real Capital Analytics estimated that half of all hotel sales that did occur were associated with some sort of distress, and many of those were real estate owned properties.
The possible forecasts of the future for this industry are good but not optimal as it is still very difficult to find attractive investments in the hotel industry. Yet, to becalm investors’ frustration, attractive terms on debt financing for this kind of transactions are now taking place and probably the sector will start flourishing once again.
Sources and References: Bloomberg, Reuters, Yahoo!Finance, Wall Street Journal, Financial Times
To contact the authors:
Fabrizio Colloca fabrizio.colloca@studbocconi.it
Carmen Deza Perez carmen.perez@studbocconi.it
Francesco Polga francesco.polga@studbocconi.it
Giada Zhang giada.zhang@studbocconi.it
To contact the editor responsible for this story:
Fabrizio Colloca fabrizio.colloca@studbocconi.it
Bocconi Students M&A Circle 