When Marriott International’s $12.2 billion bid for Starwood Hotels and Resorts Worldwide was announced on Monday morning, investors and analysts were surprised.
It was not the sale itself — Starwood, whose brands include Westin, W and Sheraton, had effectively put itself up for sale in late April — but that the buyer was Marriott.
Of all the rumored suitors — Hyatt Hotels Corporation,
InterContinental Hotels Group and a few Chinese companies — Marriott
had not been seen as being in the mix. On Marriott’s earnings call on
April 30, the company’s chief executive, Arne Sorenson, waved off a
question about a combination, saying it was inconsistent with its
previous acquisition strategy.
The
hotel industry has changed since the spring, however. The stocks of
Marriott and Starwood have declined at least 9 percent since that time,
and trends like the stronger dollar and competition from the
room-sharing start-up Airbnb have made consolidation more attractive,
according to analysts.
That
changed the dynamics of a deal. Hyatt was a competitive bidder almost
to the end, people briefed on the negotiations said. But the unexpected
suitor, Marriott, had an offer that was similar to Hyatt’s, and the
Starwood board ultimately concluded that Marriott’s stock had greater
potential, said these people, who spoke on the condition of anonymity
because the proceedings were private.
As
it became clear that Marriott would prevail, the advisers to the two
companies met and reached a deal in New York through the weekend, the
people said.
On
Monday, Marriott announced that it would acquire Starwood for $11.9
billion in stock and $340 million in cash. That means cash was used for a
mere 2.8 percent of the deal, which is the seventh-lowest percentage on
record for cash-and-stock deals greater than $10 billion, according to
data compiled by Dealogic.
The
deal creates the world’s largest hotel company, with more than 5,500
owned or franchised hotels with 1.1 million rooms around the world.
The
agreement represented a premium of about 6 percent above the average of
where Starwood’s stock had traded in the 20 days before Nov. 13,
according to a statement Monday. The premium was 19 percent using the
same period through Oct. 26 when the recent takeover speculation began.
How Wall Street Has Reacted to the Deal
Given
the competitive sales process, investors were disappointed by the
lower-than-expected premium, and Starwood’s shares fell 3.6 percent on
Monday. Marriott’s shares gained 1.4 percent. That is the opposite
effect of what traditionally happens after a takeover is announced.
Still, Starwood’s premium was higher than what Blackstone agreed to spend in September on Strategic Hotels —
which owns the Four Seasons hotels and resorts in Silicon Valley,
Washington and Jackson Hole, Wyo., the Fairmont and Intercontinental
hotels in Chicago, and the JW Marriott Essex House Hotel in Manhattan.
That $6 billion deal came at a 13 percent premium to the company’s price
on July 23, before an article was published about a potential
transaction.
It
seems unlikely, although possible, that Starwood will get another
bidder at this stage. The merger agreement said Starwood would have to
pay Marriott a $400 million fee to get out of the deal and did not grant
Starwood the ability to shop the offer around.
Mr.
Sorenson would remain president and chief executive of Marriott after
the transaction closes and the headquarters will continue to be in
Bethesda, Md. Marriott’s board of directors will increase to 14, with
the addition of three members from Starwood.
Lazard
and Citigroup provided financial advice to Starwood, while Deutsche
Bank advised Marriott. Cravath, Swaine & Moore served as legal
counsel for Starwood and Gibson, Dunn & Crutcher counseled Marriott.
The two companies say that they are stronger together than apart.
The
combined hotelier would have posted more than $2.7 billion in fee
revenue for the 12 months that ended Sept. 30. The transaction would
enable $200 million in annual cost savings in its second full year after
closing by leveraging back-office and operational efficiencies.
The
deal came after Starwood announced last month that it would spin off
its time-share business, Vistana Signature Experiences, and merge it
with a subsidiary of the Interval Leisure Group. Starwood shareholders
are to receive $7.80 a share, or about $1.3 billion, as part of that
transaction.
One
of the biggest challenges that Marriott will have to confront is
Starwood’s Sheraton brand, which has been struggling, according to
Robert LaFleur, an analyst with JMP Securities.
“One
of the reasons Starwood went on this review to begin with was the
Sheraton brand,” Mr. LaFleur said by telephone. “If there’s anyone who
can fix it, it would be Marriott. I think it will take a couple of years
for these companies to realize these synergies broadly.”
The
deal could also prompt a series of other transactions. Marriott could
either decide to turn around the Sheraton brand or sell it outright,
said Wouter Geerts, a travel analyst with Euromonitor International.
“The
announcement of this acquisition continues the consolidation trend in
the travel industry,” Mr. Geerts said by email. “It is unlikely that it
stops here.”
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