It's been a great week for Marriott (NYSE:MAR). In the past few days, competition authorities in the EU, Saudi Arabia, and Mexico cleared the hotelier's acquisition of Starwood Hotels & Resorts (HOT). China now remains the only country in which MAR and HOT still require the go-ahead from authorities before they complete their historical merger. Approval is expected within the coming days. The MAR/HOT merger will create the world's largest hotel chain, consisting of 5,500 hotels, 30 brands, and 1.1 million rooms. Shareholders on both sides overwhelmingly approved the merger when it was proposed last year, and the aggressive push on behalf of HOT owners for a transaction involving equity is testament to the optimistic prospects for the combined entity. We discuss some of the impacts that this deal will have on the global lodging industry, and how you can still profit from it.
The HOT acquisition has been baked into MAR's stock price for some time, but we still view Marriott as an attractive long-term investment. Analysts expect the Starwood deal will lead to 250 million in annual cost savings. But the real value resides in the greater bargaining power that MAR will be able to exercise as a result of the deal, as well as its increased international exposure. Due to MAR's large scale, the firm already enjoys strong bargaining power over hotel owners through its fee-based management and franchising model. The company is the undisputed leader in managed properties, and MAR's strong brands and operational expertise attracts owners who typically seek to outsource management tasks to established companies with proven histories. Switch costs are high for owners because renovation and rebranding are expensive endeavors, so owners tend not to terminate contracts. The Starwood deal will further strengthen MAR's leverage over property owners, who will have fewer choices over franchisors. Even if travel volumes slow we are optimistic that MAR can grow revenues by raising prices. The franchise model also exposes MAR to less risk as it requires smaller capital outlays and generates recurring revenues through the duration of the contracts. So, while many analysts speculate that we are at the peak of the travel cycle, MAR is better insulated than most to a downturn.
MAR's broadened emerging market exposure is another attractive aspect of the deal. Starwood has invested heavily in the Asia Pacific region, and this is where the bulk of global travel and leisure spending growth will take place over the next 15 years as developing market incomes rise. The acquisition will make Marriott the dominant brand in the Asia Pacific, which should help the firm offset saturation in its more mature markets. Last year the Asia Pacific region accounted for just 9% of Marriott's total revenues, but that figure is estimated to reach 15% after the Starwood merger. In summary, we think Marriott's economic moat, favorable secular growth trends, and below average risk make it an attractive long-term investment opportunity, especially after the Starwood merger.
Moving beyond the most obvious candidate, there are other ways to profit as well. The MAR/HOT merger will likely trigger a wave of consolidation across the global lodging industry as other firms attempt to keep pace and remain competitive. Due to the high fixed cost nature of many operators, scale is an important competitive factor in this sector. And the quickest way to meaningfully grow scale is by acquiring it. There should be plenty of opportunities to do so. Interest rates will remain suppressed for the foreseeable future, and the industry is highly fragmented, with the largest four firms accounting for just 12% of total revenues according to IBISWorld. The strongest takeover targets will be those companies that operate franchise-based models, and who have manageable debt levels and substantial emerging market exposures. Keep your eye on Accor SA (ACCYY), Hyatt Hotels (NYSE:H), Hilton Worldwide (NYSE:HLT), InterContinental Holdings (NYSE:IHG) and Shangri-La (OTCPK:SHALF).
Belmond (NYSE:BEL) is another firm to keep your eye on. Compared to the other names mentioned in this article Belmond is quite small. The company owns, invests, or manages a total of 34 deluxe hotels and resorts in the US, Mexico, Caribbean, Europe, South Africa, South America, and Southeast Asia. BEL differentiates itself by "providing guests with a window into authentic 'one-of-a-kind' experiences in some of the most unique destinations in the world". These properties are situated in exotic areas with strict zoning laws, making it difficult for other chains to replicate the experience on offer. BEL is too small to be a serious acquisition target, but it could benefit from changing consumer preferences as a result of the MAR/HOT acquisition. According to Practical Law, a real estate advisory company, "as the larger brands merge and create less specialized, more uniform franchises, new, smaller hotel brands may have the opportunity to gain market share by catering to the unique demands of owners looking to maximize value in individual locations".
The MAR/HOT acquisition is expected to finalize this month, and this event is already baked into the share prices of these companies. However, investors with a long-term focus can still benefit from the deal, and MAR is a great choice of those looking to get exposure to favorable long-term travel trends. There will be other opportunities in the hotels and resorts sector, as the deal will likely fuel a wave of M&A activity. Finally, investors may want to consider smaller "niche" hotel chains that can offer something different than the others.
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.
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