Starwood Hotels & Resorts Worldwide Inc.; Market Cap: $12.18bn (as of 19/11/2015)
Marriott International Inc.; Market Cap: $ 18.64bn (as of 19/11/2015)

 

Introduction

On November 16, Marriott International, Inc. (NASDAQ:MAR) and Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) announced that the boards of directors of both companies unanimously approved a definitive merger agreement, creating the world’s largest hotel company. The $12.2bn deal, $11.9bn in stock and $340m in cash, will give birth to a new hotel conglomerate with over 1.1 million rooms in more than 5,500 hotels spanning the globe in over 100 countries.

About Starwood Hotels & Resorts Worldwide, Inc.

Starwood Hotels & Resorts Worldwide, Inc. is an American hotel and leisure company headquartered in Stamford, Connecticut. It is one of the world’s largest hotel companies: managing, operating, franchising, and owning hotels under its ten brands. Some of its most popular brands include Westin, W, Sheraton, Le Méridien and St. Regis.  In 2014 Starwood owned, managed, or franchised more than 1,200 properties employing over 180,400 people. Starwood generated about $6bn in revenue and $643m in net income in 2014.

About Marriot International, Inc.

Marriot international, Inc. is an American diversified hospitality company that manages and franchises a diverse portfolio of hotels and lodging facilities. Founded in 1993, Marriott was the first hotel company worldwide to offer guests the option to book reservations online. Marriott has more than 4,087 properties in over 80 countries around the world with over 697,000 rooms. Marriot generated $13.8bn in revenue and $753m in net income in 2014.

Industry Background

The hotel segment is a wide-ranging category within the hospitality industry that globally generates approximately between $400-500bn in revenue each year, one third of which is attributable to the United States. It is a highly competitive industry with the major players being InterContinental Hotels Group, Marriott International Hilton Worldwide, Accor, Starwood Hotels & Resorts, and the Wyndham Hotel Group.

Hotels are classified based on services they offer into 1 Star, 2 Star, 3 Star, 4 Star, 5 Star, and unrated. The 3 Star segment holds the largest market share in the global hotels market; increasing domestic tourism and demand for luxurious lifestyles drive its popularity. The unrated segment is expected to be the fastest growing segment due to increasing demand in budget hotels. Geographically, North America is the largest as well as fastest growing market for hotels globally.

The hotel industry has been demonstrating strong growth as indicated by their hotel occupancy rates – a key performance indicator for the industry. Currently occupancy rates are averaging 65% in the US, but according to Morgan Stanley rates are expected to rise to 69.1% in 2017. Despite strong growth, the hotel industry is under pressure from the room-sharing start-up Airbnb, which is disrupting traditional market dynamics and stealing market share. Airbnb currently has over 50% of 3-5 night travelers and is aggressively trying to expand its presence in the industry.

Marriott’s decision to buy Starwood is an indicator that modern hospitality companies view mass scale as essential to their success, given that the internet is removing old barriers to entry. Traditional hotel companies, like Marriott and Starwood, are being compelled to increase their global footprint for fear of losing market share to more nimble competitors.

Terms of the Deal

Marriott announced that it would acquire Starwood for $11.9bn in stock and $340m in cash. Starwood’s shareholders will receive approximately $72.08 per share. Cash portion will amount to $2.00, while the biggest part, $70.08, will come in the form of 0.92 shares of Marriott Class A common stockbased on the 20-day VWAP (volume weighted average price) ending on November 13 ($76.17), giving Starwood investors 37% of the combined company. Another $7.80 will come from the previously announced spin-off of Starwood’s timeshare business, which should close prior to the Marriott-Starwood merger closing.

The offer of $72.08 per share represents a 4% discount to the closing price on Friday 13. Yet, after adjusting for the value of consideration to be separately received by Starwood shareholders in the timeshare transaction, the merger consideration represents a premium of approximately 6.5% and a premium of approximately 19% using the 20-day VWAP ending October 26, before acquisition rumors.

Deal Rationale

Marriott expects to deliver at least $200m 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, which, as indicated by Starwood CEO, are anticipated to be in range of $100m to $150m.

Earnings will mainly benefit from: post-transaction asset sales as Marriott expects Starwood to continue its capital recycling program, generating an estimated $1.5-2.0bn of after-tax proceeds from the sale of owned hotels over the next two years; increased efficiencies by leveraging economies of scale in reservations, procurement and shared services, and accelerated unit growth of Starwood’s brands leveraging Marriott’s worldwide global footprint.

Furthermore, Marriott and Starwood generated $2.7bn in revenue in the last 12 months. As the combined company will bring two of the most expert and innovative teams in the industry and gather a clientele of over 75 million customers, it expects to return over $2.25bn in share repurchases and dividends to shareholders in both 2015 and 2016.

One final consideration is to be made regarding potential clashes between different customer types. Today, both companies adopt various loyalty programs: Marriott Rewards, with 54 million members, and Starwood Preferred Guest, with 21 million members, are among the industry’s most-awarded loyalty programs, driving significant repeat business.  Marriott expects the positive impact on revenues of these loyalty programs to be even stronger when the companies merge. Yet, some factors may push in opposite direction. In fact, loyalty programs are far from similar; Starwood “Preferred Guest” confers considerable perks to the company’s most frequent customers. For instance, even a short staying of 25 nights a year would guarantee 4 p.m. checkouts at most Starwood’s hotels, a benefit that is only offered subject to availability at Marriott. To exaggerate, clients staying at least 100 nights a year are assigned a personal travel ambassador to handle their bookings, and arrange customized perks. Members worry it will become harder to get perks, and this worry is not unreasonable if we consider the notable reduction in frequent flyers advantages after the consolidation in the airline industry triggered by low-cost carriers – may Airbnb represent a similar catalyst for hotels?

 

Market Reaction

Marriott’s share price positively reacted to the deal with a 1.4% increase after announcement (from $72.49 on Nov. 13 to $73.47 on Nov. 16). However, Starwood’s share price experienced a 3.6% drop from $74.99 per share on November 13 to $72.27 per share on November 16. The fall in Starwood’s shares is indicative of investors’ dissatisfaction with Marriott’s offer, which represented a 4% discount to the stock’s price on November 13, excluding value of spin-off proceedings. Much speculation took place over how much the company would be valued for in a sale and investors were hopeful for a higher price. Moreover, cash as a source accounted for insignificant 2.8% of the deal, which is the seventh-lowest percentage on record for noteworthy, greater than $10 billion, cash-and-stock deals, as per information gathered by Dealogic. In addition to that, merger agreement includes no-shop clauses, which prevents Starwood to negotiate with the companies such as Hyatt Hotels Corp and a Chinese consortium, and break-up penalty is set to $400m.

Financial Advisors

Deutsche Bank Securities is serving as financial advisor to Marriott International, Inc., while Lazard and Citigroup are the financial advisors to Starwood Hotels & Resorts Worldwide Inc.

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