Marriott's Likely Loss Of Starwood Brings Relief To American Express Shareholders

| About: American Express (AXP)


Marriott's offer for Starwood has been resoundingly beaten.

The premium for Starwood assets is getting very high; Marriott will likely walk in my opinion.

With Marriott potentially walking, the spectre of losing another co-brand relationship is fading.

As most shareholders are now aware, Starwood Hotels (NYSE:HOT) recently received what I believe to be an immensely better bid for its remaining business from a consortium of Chinese investors. This consortium consists of Anbang Insurance, J.C. Flowers, and Primavera Capital. Details of the offer are much improved from Marriott's (NASDAQ:MAR) previous bid, with the now top offer made up of $78.00/share of cash, plus Starwood shareholders are still entitled to the $5.67/share they are set to receive from the previously arranged merger/spin-off of its vacation ownership business, set to go to International Leisure Group (NASDAQ:ILG). All total, the total value of this new offer is now $83.67/share.

Old Offer Outdone

Shareholders may recall the old offer, consisting of 0.92 shares of Marriott International shares and $2.00 in cash ($65.33/share at current Marriott equity prices), plus $5.67/share for the ILG merger/spin-off, which puts total value at $71.00/share.

This new offer is nearly 18% higher than the prior offer, and as it consists mostly of cash consideration, will likely be vastly more appealing to shareholders. Even if Marriott did boost its offer, it would have to offer a sizeable premium in my opinion for the Starwood board, if acting in shareholders' best interests, to knock down this new all-cash offer.

Marriott has ten days to counter, and I don't believe they will be able to match the quality of this offer. This new offer is more than $2B higher in consideration, more than offsetting the $400M breakup fee that Marriott would be entitled to as a result, likely a large sticking point when the consortium came to Starwood with this offer. I'm not sure Marriott is going to be willing to pay more than 14x ttm EV/EBITDA for the Starwood business, despite their propensity for overpaying in the past. That's an expensive price to pay, and they are likely to back down and focus elsewhere, perhaps fishing around for a deal for Hyatt (NYSE:H) instead, which trades at a much cheaper 11.2x ttm EV/EBITDA, while also carrying similar of the big perks of the Starwood business (extremely loyal customer base, top tier properties in metro locations, etc.).

So, Who Are These Guys?

While this may come out of nowhere and has many investors questioning "Who is this consortium?", those who follow the industry likely recognize the name. Anbang just bought Strategic Hotels and Resorts from Blackstone for $6.5B, and also paid $2B for the historic Waldorf Astoria in Manhattan late in 2014. The group clearly sees a lot of strategic value in real estate, and has seen buying multi-billion dollar hotel chains as the best way of achieving the scale they want quickly.

Anbang is primarily an insurer, providing property, life, and health insurance in Greater China. With that said, the company also has some niche businesses, having both banking and asset management subsidiaries as well. Like a lot of large Chinese companies, Anbang has moved outside of China and now has global scale via the company's penchant for overseas acquisitions, buying Belgian insurer Fidea, Korean insurer Tong Yang Life, and U.S. Fidelity & Guaranty Life in recent years. With more than 30,000 employees and total assets in the hundreds of billions of dollars, this isn't a small, no name firm, and they have experience making deals in Western countries. Regulatory risk is, in my opinion, rather low.

Loyalty Program

I have no horse in the hotel race, but I do have one in American Express. American Express (NYSE:AXP) and Starwood Hotels have what I believe to be an incredibly important co-brand relationship; one that is likely integral to American Express' long term health. My fear, written here on Seeking Alpha back in November when this deal was announced, was that Marriott's relationship with Chase (NYSE:JPM) would win out as the sole co-brand relationship once the acquisition took place. It is incredibly uncommon within the co-branding space to have multiple relationships with multiple partners, and from my talks with people within the industry, ensuring this isolation is often a key part of co-brand contract negotiations. Hotels/airlines that engage in co-brands with credit card companies are demanding more and more money for that privilege, and the credit card issuers are demanding monogamy as part of the deal.

American Express' CEO Ken Chenault pulled the "we can't talk about it" card when faced with the question on whether their contracts have this structure the Q4 2015 earnings call:

"…obviously it would be totally inappropriate for me to go in to the terms of the contract. But what I would say that's very clear is that if you have a group of customers that in fact have relied on getting very strong value for a product, the last thing you want to do is diminish the value of the product. And as I said earlier, and not just from us but if you look at independent card surveys, the SBT product is one of the highest rated products from a value standpoint."

That's a typical boilerplate response to this type of question, and the sentiment was echoed by CFO Jeff Campbell on the same call, but his response struck a little bit more of a grim tone:

""On Starwood, we'll have to see, we think we do a great job and have a great partner for Starwood we think we have a great partnership and I think SPG is one of the assets that Marriott is acquiring, but we'll have to see over the longer term exactly where Marriott decides to take the two programs."

As an American Express long, the possibility of losing this deal was one of the biggest potential issues facing me as a shareholder. If Starwood Hotels is instead sold to the consortium, it's likely that the Starwood program stays with American Express and we don't see changes. In any case, the risk for change is much greater with Marriott. While some investors might be concerned with foreign ownership of what has traditionally been a strong Western hotel brand, I'd recommend those with fears speak with those who have traveled in Asia. Rewards programs are highly regarded as a key benefit of hotels there, and even within the Western chains, hotel-goers often get far better treatment in Asia than they do here based on their status within the hotel chain. The Asian markets as a whole understand much better, in my opinion, the value that repeat guests and business travelers bring to bottom line profitability, and you simply don't see the degree of what I believe to be short-sighted penny pinching when it comes to degrading the benefits extended to a hotel's most important guests. This attitude will likely extend to the co-branding relationship with American Express, especially within a society that values the prestige that American Express purports to still deliver. American Express shareholders should breathe a sigh of relief with this surprise.

Disclosure: I am/we are long AXP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.