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Q&A: Sorenson ready to write Marriott’s next chapter

When the final signatures dry, Marriott International will begin the no doubt complicated process of absorbing Starwood Hotels & Resorts, creating the world’s biggest hotel company with 31 brands, more than 5,500 hotels and 1.1 million rooms in 100-plus countries. Marriott CEO and deal trigger man Arne Sorenson said he has never wavered in his desire to take this challenge head on and is most anxious to get the wheels in motion.

Much has been written and debated over the past few months as to whether this nearly US$14 billion deal makes sense for the two companies involved and if it acts as the linchpin for more “size matters” big deals to help brands create new stories, court developers and fight the good fight against disruptors, and drive guest loyalty.

HOTELS’ Investment Outlook talked to Sorenson in late April about not only the deal but other timely and topical story lines that will no doubt become fodder in the months ahead.

HOTELS’ Investment Outlook: What do you want to accomplish next?

Arne Sorenson: For the next number of years this deal has filled my plate – it’s overflowing. This is a great challenge and I think it’s an attractive deal financially. I also think it’s an attractive deal strategically and we’ll create tremendous value with it. And, of course, that’s what we do, and I just look forward to getting to work on it.  I hope that we’re able to look back at this in a relatively short period of time and say it went every bit as well as we hoped it went. If we can do that then we’ll see what the next chapter holds.

HIO: How do you feel about the current state of macro-economics and how will it treat the deal?

AS: They are showing that we should have a continued steady, moderate growth run… I think to some extent it feels a little bit more negative than you might think because we have a political campaign underway and both sides find it in their interest to talk down the strengths of the economy.

One of the great things about the way this deal is structured is it does not change the risk perimeters in a way that makes the deal any less or more attractive based on what you assume about a macro-environment because we’re using about the same amount of cash relative to equity that the current company already has. Now, it’s not quite exact because we ended the year at roughly 3x debt to EBITDA, and when we close the transaction midyear we estimate we’ll be more like 3.5x debt to EBITDA.

The way our financial model works, we’ll be back to the 3.0-to-3.25 range, which is our target before the calendar year is out, and that does not depend on any unique, aggressive assumptions about sales, assets sales or anything else of the sort.

HIO: How does the state of debt financing potentially impact the Starwood deal?

AS: We received a bank commitment for US$3.6 billion as part of the Starwood deal in a weekend. We probably won’t use it because I think before we close we’ll end up putting other financing arrangements in place. But what the market feels like to us is quite strong, and that is still driven by relative lack of opportunities with predictable yields and plenty of capital that’s out there. When you get to debt for hotel financing what we hear from our partners is still mostly reassuring. We were all worried in January that we would see a meaningful decline in available financing. While there’s a little bit more conservatism, it’s not dramatic.

"I think the most important thing for us to do, though, is to be successful in this deal. We have to deliver improved revenue performance to both portfolios and hotels, and if we can do that I think these kinds of issues are in no way made worse by reason of the transaction itself." -- Arne Sorenson on concerns about impact issues
“I think the most important thing for us to do, though, is to be successful in this deal. We have to deliver improved revenue performance to both portfolios and hotels, and if we can do that I think these kinds of issues are in no way made worse by reason of the transaction itself.” — Arne Sorenson on concerns about impact issues

HIO: How do you see the trends in asset values and pricing of debt impacting asset sales?

AS: When you get to the bulk of the assets in the United States and Europe, you still have global capital interested in forever assets and, as a consequence, I would think that these assets remain quite saleable. Whether the price available today is as attractive a cap rate as the price that might have been available 12 or 18 months ago, I suspect for some assets the answer is going to be ‘no,’ that the market has softened a little bit. But, with a long-term frame of mind, the cap rate is still quite attractive.

HIO: Is your deal going to kick off more acquisition activity and further consolidation?

AS: It’s hard to predict big consolidation. Starwood was a rare event – a big public company put up for sale when most big public companies are never put up for sale, and really that’s because they’re not for sale. To do a deal even if it makes intellectual or abstract sense hardly means it’s going to happen and, as a consequence it’s dangerous to predict that there will be large scale consolidation. Now, obviously, the better the report card we get in the years ahead, the more that will be, in effect, a recommendation to folks to do something similar.

HIO: How much bargaining power do you think there’s going to be with OTAs?

AS: We have a fascinating relationship with the OTAs. On the one hand they often deliver incremental business… Increasingly the question is do they grow out of that space into a space in which they’re simply trying to process business for us for customers that we already have or could have directly because they’re more regular travelers. If all they’ve done is insert themselves into a relationship that we used to have before and extract the condition that’s associated with that, it hurts, and that’s where the tension comes from…  And, with the new members-only rates – we’ll have to see how this works out. But I wouldn’t expect the nature of these fascinating OTA relationships to change real soon.

HIO: How many brands will you have a year from now?

AS: We’ll have 31 at the deal closing, and it won’t surprise you to hear that I don’t think we’re likely to be launching new brands in the next 12 months or so. I think our hands will be full. At the same time, most of these brands already exist in the marketplace and are preforming well, and we don’t have the ability to tell a hotel owner that we’ve changed the brand on their hotel… Occasionally people will ask about selling a brand, but most of the owners have signed up to a brand because of the power of the loyalty platform and the portfolio. So to go to owners and say you used to be part of Marriott Rewards or SPG, and we’re now splitting you off and sending you to a company with a meaningfully weaker loyalty program or maybe none is not a friendly thing to do.

We have clearly seen a greater relevance of the portfolio and the loyalty program itself as a huge piece in the way we market all of our hotels across all the brands. And so does every one of the 31 brands need to be known by 70% or 80% of the potential customers that are surveyed, unaided? I think the answer is ‘no,’ it doesn’t have to be. As long as the portfolio delivers significant customers to that hotel or the portfolio of hotels in a given brand, you can still be quite successful. So we end up both focused on defining brands in a way that communicates as much as we possibly can to customers about what to expect, and we also end up investing significant dollars in marketing the portfolio as a whole.

HIO: Can you address owner concerns about royalty rate increases and potential impact issues?

AS: Our impact process, where we give notice to our hotel owners about new projects coming down the pike, is the most transparent and fairest processes of any of the major hotel companies… On balance, I think it tends to work out, and we have an advantage of having partners who are usually growing with us… As we go forward, we must make sure we remain transparent, provide notice and an opportunity for our owners to be engaged in that conversation about impact… I think the most important thing for us to do, though, is to be successful in this deal. We have to deliver improved revenue performance to both portfolios and hotels, and if we can do that I think these kinds of issues are in no way made worse by reason of the transaction itself.

We have to obviously look at what our competitors are doing in terms of royalty rates. Well, we’ll be a bit bigger, but we can’t charge royalties that are somehow not supported by the market.

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