Marriott's (NASDAQ:MAR) second pitch for Starwood (NYSE:HOT) , announced Monday morning, came as a big surprise to observers in the financial press. Many thought Marriott would abandon the offer, collect the $400 million break-up fee and go home.
Not so fast. Marriott had a second act: Monday morning, Marriott announced that it had upped its offer for Starwood to $13.6 billion, some $800 million more than Anbang's offer and some $1.4 billion above Marriott's original offer for Starwood. ( As the Boston Globe points out, Starwood shareholders are also expected to get Interval Leisure Group (NASDAQ:IILG) stock valued at $5.83 per share, bringing the total value of the deal to $14.4 billion.)
The market, anticipating a bidding war between Anbang and Marriott, has boosted the share price of Starwood while punishing Marriott for fear the hotelier might continue to pursue the Starwood target.
The Original Offer:
Share Price of Marriott International, Inc. *
Cash Consideration Per Share
Value of Vistana Disposition **
*Marriott 20-day VWAP ending November 13, 2015, calculated at 0.92 of $76.17**Based on ILG 20-day VWAP ending November 13, 2015. Excludes $132M of cash consideration and reimbursement from ILG to Starwood
Marriott's New Offer:
In its new offer, Marriott increased cash consideration to $21.00 for every share of Starwood common stock, with a new exchange ratio of 0.80 shares of Marriott common stock for each share of Starwood common stock (approximately 20 million fewer shares than original agreement).
The total consideration to Starwood shareholders is $79.53 per share (using the March 18, 2016 closing price of $73.16 and excluding the value of the timeshare business) or $13.6 billion. Starwood shareholders will own 34% of the combined company, down 3% from the original deal. Marriott's stock price, at $73.72 on November 16, 2015, while fluctuating between the "original" deal and the "new" deal, closed at $73.16 the Friday before the revised deal was announced.
Marriott says that it expects:
- Enhanced loyalty programs will increase access to new customers, create opportunities for new partnerships, and provide greater competiveness in the digital marketplace
- Sales integration will benefit existing Marriott hotels through exposure to Starwood's brand-loyal, affluent guests, and benefit Starwood hotels through Marriott's expertise in corporate, group and mid-market accounts
- 330 brands positioned against distinct and profitable customer segments
- High confidence in achieving general and administrative cost synergies
- Accelerate rooms growth in underpenetrated markets
- Attractive balance sheet and significant cash flow
- Enhance competitiveness of Starwood's brands
Marriott also upped the estimate of G&A savings in the merged companies from $200 million in November's deal to $250 million in the new deal based on the due diligence it has completed. (Marriott also restated its RevPAR and room growth in yesterday's releases.)
While unspoken in yesterday's conference call, there is also considerable savings that would come from having Starwood and Marriott on the same online reservation system, avoiding the fees charged by on-line travel agencies ("OTAs").
Risks from the New Deal:
The biggest risk might come from Starwood spurning the Anbang offer, particularly since China has not approved the Marriott - Starwood merger for hotels there, as the American and Canadian authorities have. Also at some risk, in my view, is Marriot's "Fairfield" brand deal with China's Eastern Crown Hotels.
Anbang's planned acquisition of Starwood was, for practical purposes, all but an official Chinese state government enterprise. Anbang's CEO is veritable Chinese Communist Party "royalty", married, it appears, to the grand-daughter of former Chinese Premier Deng Xiaoping, the CCP leader who brought market reforms to China's previously strict communist economy.
Anbang's Starwood offer was reportedly to be financed by China's state bank, China Construction Bank.
Still, it is clear that Anbang wants - and even needs - to move investment capital outside China, preferably in the USA. The company would be better suited to either pursue another hotel brand, a large healthcare related REIT (or their prime properties), or (as I suggested late last week) an even bigger offer for Marriott. A generous offer for Marriott, coupled with a guarantee that US managers would continue to oversee the acquired company, might be attractive to J.W. ("Bill") Marriott, the 83-year old scion of the legendary founder and an extraordinarily well-regarded businessman in his own right.
In the meantime, until Anbang finds a place to park its yuan capital overseas (and, ideally, in the United States), virtually any company with a portfolio of high-profile, high-value real estate with steady, growing, cash flow can be a target.
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