Starwood-Marriott Merger: What You Need To Know

| About: Marriott International, (MAR)


97% of Marriott's shareholders approved transaction.

95% of Starwood's shareholders approved transaction.

With the deal, 30 brands and over 1.1 million hotel rooms will be under one roof.

Starwood (HOT) and Marriott (NYSE:MAR) are finally tying the knot. The two hoteliers will become one at some point in mid-2016 after a long courting process that included an additional suitor from China. Shareholders of both Starwood and Marriott approved the deal overwhelmingly last week. From the Marriott side, 97% of shareholders approved the deal, while the Starwood side got the thumbs up from 95% of shareholders.

The marriage will take place in mid-2016 after Starwood completes its divestiture of its timeshare business in a deal with Interval that is expected to conclude later this month. Under the terms of the deal, Starwood's shareholders will receive 0.8 shares of Marriott's stock plus $21.000 in cash for each Starwood share.

Once combined, the portfolio will include over 5,000 individual hotels, over 30 brands, and over 1.1 million hotel rooms. Known brands like Marriott, Ritz Carlton, Sheraton, Courtyard, Residence Inn, Westin, W, and Four Points will all be under common ownership.

For investors, the play is likely a longer term issue. Clearly, there will be certain efficiencies created, but at the same time, the company may be exposed to more than desired inventory in particular markets. It will take time to assess not only the overall company, but regions and markets as well. Perhaps what is most attractive for investors is the added pricing power that this merger brings. With the merge, the number of available hotel rooms in a market under control of one entity will shift. Instead of Starwood and Marriott competing aggressively against each other in the space, they can actually carry much more control over setting the market prices.

As with any big corporation, there are many things to consider. What were once competing brands may now shift to servicing different segments. Depending on the longer term strategy, we may even see certain properties flying new hotel flags under a different brand. In addition, there will now be opportunity for the company to package some hotels together to sell off, creating even more cash flow and perhaps more synergies. With the deal, Marriott will become the world's largest hotelier. That status gives Marriott a lot of influence and power.

The hotel business is reliant on the economy. As long as a hotel can run efficiently, it can survive the downturns in the economy and benefit greatly from the upturns. In my opinion, the hotel business got leaner and meaner in the most recent economic downturn and this merger actually makes great sense for the business model. Even being able to gain a few dollars per available room can make a huge difference to the bottom line.

In my opinion, the real efficiencies in this deal will bear fruit in phases over the next 24 to 36 months. Immediate efficiencies will begin to be realized in trimming back duplication in corporate structure, while assessment of the overall portfolio will play out over time. In bringing these brands under one roof, the companies actually have less pressure to renovate in the near term in order to "one-up" the competition. No, they cannot take their proverbial foot off of the gas, but they can step back and assess each region and market in order to make informed decisions.

I see this sector as a longer term play. The hotel space runs in cycles of merging and consolidation to selling off. As the economy begins a recovery, Marriott will be looking to increase the bottom line on each property as well as overall. At some point when the cycle begins to go the other way, Marriott will have plenty of inventory to create and sell hotel portfolios. Over time, we may see certain brands absorbed into others as well.

Starwood is currently trading at about $80 per share. Marriott is currently trading at $67 per share. Investors can find the arbitrage between the two companies and make the best play. On top of the Marriott deal, Starwood's shareholders will get considerations from the timeshare merger. That complicates looking at the arbitrage in the near term. In my opinion, there will be opportunity to play the arbitrage of the Marriott deal once the timeshare segment of the Starwood deal is complete. Pay attention, and as always... Stay Tuned!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.