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Blockbuster deal: Marriott acquires Starwood

When the deal closes in mid-2016, the new Marriott International will have 1.1 million rooms, 5,500 hotels and 30 brands – yes 30 brands – and fee revenues of more than US$2.7 billion.

On Monday morning, the hotel world woke up somewhat surprised to learn that Marriott International had announced it acquired Starwood Hotels & Resorts for US$12.2 billion, consisting of US$11.9 billion in Marriott stock and US$340 million in cash.

After initially considering the deal too expensive when Starwood came up for strategic review seven months ago, Marriott President and CEO Arne Sorenson said Monday morning, “The driving force behind this transaction is growth. This is an opportunity to create value by combining the distribution and strengths of Marriott and Starwood, enhancing our competitiveness in a quickly evolving marketplace. This greater scale should offer a wider choice of brands to consumers, improve economics to owners and franchisees, increase unit growth and enhance long-term value to shareholders.”

Sorenson added during the conference call that as Marriott continued to consider the potential acquisition over the course of the last seven months it saw Starwood’s stock value drop 15%. Add Starwood’s appealing global footprint that Marriott is lacking and then the announced sale of its timeshare business and Starwood quickly became a more appealing option. Soon thereafter, the deal moved forward very quickly, according to Sorenson.

During Monday’s conference call, Starwood Interim CEO said his company liked the idea of acquiring Marriott stock because it wants to participate in what it perceives as a big upside. “We wanted stock as the opportunity to put these two companies together is enormous,” Aron said. “It’s a game changer and becomes to go-to stock now.”

HOTELS reached out to a few industry leaders for comment and received three quick responses:

“Marriott made a smart acquisition,” said Lee Pillsbury, chairman, Thayer Lodging Group, Ft. Lauderdale, Florida. “The new, larger Marriott system will have a much stronger negotiating position vis a vie the OTAs, further leverages its rewards program (already the best in the industry), acquires a very attractive growth vehicle in the W brand, and creates a true global powerhouse. Their competitors have to be worried this morning.”

Laurence Geller, chairman of Geller Investment Co., Chicago, added, “It’s a category killer combination – a great fit. Now this will start a chain reaction of consolidation, which is long overdue.”

“This deal may be good for Marriott, and it puts Starwood out of its misery,” said Kirk Kinsell, president and CEO of Loews Hotels and Resorts, New York City. “Yet I wonder what owners will feel. Guests will have more choices but remember that Marriott is, and will be, asset light so the EBITDA is the owners and I don’t see Marriott lowering their costs while now the owner has more competition in market; less attention from leadership; and disruption in team members needing to focus on the guest… Yes, it will cause peers to consider combinations but I believe that execution and trust will be the winning metrics.”

In his commentary in response to the deal’s announcement, R.W. Baird analyst David Loeb said, this merger addresses Starwood’s lack of traction with its select-service brands and should allow for greater differentiation within the Sheraton brand by potentially rebranding several Sheraton hotels (particularly in the U.S.) to other brands in the Marriott system (e.g., Delta).

Loeb added that this transaction should allow Marriott to better compete with emerging alternative lodging companies (including Airbnb) and increase its investments into new hotel-related technologies.

Deal terms

Under the terms of the agreement, at closing, Starwood shareholders will receive 0.92 shares of Marriott International, Inc. Class A common stock and $2 in cash for each share of Starwood common stock. On a pro forma basis, Starwood shareholders would own approximately 37% of the combined company’s common stock after completion of the merger using fully diluted share counts as of September 30, 2015.

Total consideration to be paid by Marriott totals $12.2 billion consisting of $11.9 billion of Marriott International stock, based on the 20-day VWAP (volume weighted average price) of Marriott stock ending on November 13, 2015, and $340 million of cash, based on approximately 170 million fully diluted Starwood shares outstanding at September 30, 2015.

Based on Marriott’s 20-day volume weighted average price (VWAP) ending November 13, 2015, the merger transaction has a current value of US$72.08 per Starwood share, including the $2 cash per share consideration. Starwood shareholders will separately receive consideration from the spin-off of the Starwood timeshare business and subsequent merger with Interval Leisure Group, which has an estimated value of approximately US$1.3 billion to Starwood shareholders or approximately US$7.80 per Starwood share, based on the 20-day VWAP of Interval Leisure Group stock ending November 13, 2015. The timeshare transaction should close prior to the Marriott-Starwood merger closing.

One-time transaction costs for the merger are expected to total approximately US$100 to US$150 million.

Marriott will assume Starwood’s recourse debt at the closing of the transaction and remains committed to maintaining an investment grade credit rating and to continue managing the balance sheet prudently after the merger. Marriott expects to maintain our 3.0x to 3.25x adjusted debt to adjusted EBITDAR target.

Sorenson will remain president and CEO of Marriott International following the merger and Marriott’s headquarters will remain in Bethesda, Maryland. Marriott’s Board of Directors following the closing will increase from 11 to 14 members with the expected addition of three members of the Starwood Board of Directors.

More reasons why

During the Monday conference call, Marriott’s Sorenson said while efficiencies will be considered, Marriott plans on keeping and growing all of the 30 brands it will have in its stable.

The company also listed several other expectations in the near term: 

  • Marriott also expects to deliver at least US$200 million in annual cost savings in the second full year after closing. This will be accomplished by leveraging operating and G&A efficiencies.
  • Marriott expects the transaction to be earnings accretive by the second year after the merger, not including the impact of transaction and transition costs. Earnings will benefit from post-transaction asset sales, increased efficiencies and accelerated unit growth.
  • Marriott expects Starwood to continue its effort to sell assets, generating an estimated US$1.5 to $2.0 billion of after-tax proceeds over the next two years.
  • In 2015, Marriott expects to return at least US$2.25 billion in dividends and share repurchases to shareholders. Marriott believes it can return at least as much in the first year following the merger.
  • Marriott expects to accelerate the growth of Starwood’s brands, leveraging Marriott’s worldwide development organization and owner and franchisee relationships. The combined company will have a broader global footprint, strengthening Marriott’s ability to serve guests wherever they travel.
  • Marriott will immediately leverage the 54 million members of its Marriott Rewards and 21 million members of Starwood Preferred Guest to drive even further repeat business. 
  • The combined company will be able to realize increased efficiency by leveraging economies of scale in areas such as reservations, procurement and shared services. Combined sales expertise and increased account coverage should drive additional customer loyalty, increasing revenue.
  • Marriott expects that these enhanced efficiencies and revenue opportunities should drive improved property-level profitability as well as greater owner and franchisee preference for the combined company’s brands.
  • Marriott remains committed to its management and franchise strategy, minimizing capital investment in the business to generate attractive shareholder returns.

In closing, J.W. Marriott, Jr., executive chairman and chairman of the board of Marriott International, said, “We have competed with Starwood for decades and we have also admired them. I’m excited we will add great new hotels to our system and for the incredible opportunities for Starwood and Marriott associates. I’m delighted to welcome Starwood to the Marriott family.”

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