Could Starwood Merge With IHG Or Wyndham?

In mid-February Starwood’s CEO, Frits van Paasschen, suddenly resigned. This was a bit of a surprising move, given that Starwood didn’t have a permanent CEO replacement ready to go.

This was probably related to the fact that Starwood’s stock hasn’t been performing as well as some investors had hoped. This seems to be linked to Starwood growing at a fairly slow rate, in particular in the limited service hotel sector.

There’s no arguing that Starwood is way behind when it comes to limited service hotels, especially when you look at the offerings of Hilton and Marriott. As a customer that’s something I’m fine with, ultimately, since limited service properties aren’t really something I’m after. But of course shareholders are going to have a different take, since it’s also a sector where there’s a lot of growth potential.

SpringHill-Suites
SpringHill Suites, one of Marriott’s limited service brands

Bloomberg ran a story yesterday about how IHG or Wyndham merging with or taking over Starwood is a distinct possibility:

While InterContinental’s 6.4 billion pound ($9.6 billion) market value is smaller than Starwood, the company is more expensive relative to sales and profit, which would pose a challenge for any deal.

“Starwood has a lot of concentration at the high end of the hotel segment, but that’s not where the growth is, so they need some balance,” Nikhil Bhalla, an analyst for FBR & Co., said in a phone interview. “But in this stage of the cycle, they’re going to have to pay up to acquire any brands and that may not be accretive. So I think the best route for Starwood would be a sale of the company.”

SunTrust’s Scholes said it might be a good fit for Wyndham, which at $11 billion is slightly smaller than Starwood. Wyndham lacks higher-end brands, which is a drawback because customers that are loyal to certain hotels like to have options depending on their type of travel, he said.

Wyndham CEO Thomas Conforti has said the company is looking for acquisitions. Small transactions are more likely, but “should a big deal come up that’s compelling and helps us achieve our objectives, we wouldn’t shy away from it,” Conforti said last month during an analyst conference. A representative for Wyndham declined to comment.

While I’m not sure a merger with IHG or Wyndham is necessarily the answer, I’d be willing to bet we’re going to see some serious changes with Starwood, whatever form they come in.

On the surface Wyndham and Starwood seem fairly complementary, given that Starwood has a large variety of high end hotels, while Wyndham has a large variety of lower end hotels.

That being said, as an SPG loyalist, it would be terrible news, as I’m sure the program would change drastically.

To clarify, as someone obsessed with loyalty programs, I’m not opposed to all mergers/takeovers. For example, IHG taking over Kimpton was positive news for my stay patterns.

I love Kimpton properties, but their portfolio isn’t big enough for me to exclusively be loyal to them. While that takeover is likely terrible news for Kimpton Karma Rewards loyalists, it’s positive news for people like me, who like to occasionally stay at Kimptons, but can’t justify staying at them dozens of nights per year. Hopefully soon enough I’ll be able to redeem my IHG Rewards Club points and free night certificates at Kimpton properties.

Kimpton-InnerCircle-Welcome-Amenity
I’d expect Kimpton’s amazing personalized loyalty program to be discontinued at some point

Meanwhile for my needs, Starwood is a big enough brand so that I wouldn’t really benefit from the much larger portfolio, and it would no doubt lead to Starwood Preferred Guest being gutted. There does seem to be a pretty direct inverse correlation between elite benefits and the number of limited service properties a brand has.

I do hope Starwood will remain independent, though to do so they’ll need to make some serious changes to keep their investors happy.

What’s your take on this — what would you like to see Starwood do, and what do you think is likely to happen? 

Comments

  1. If Starwood merged with anyone else my major concern would be 1) potential changes to the SPG AmEx 2) changes to the SPG expiration policy (Wyndham points have a shelf life) and 3) changes to the transfer ratio to airlines.

  2. I, for one, pray this does not happen. SPG is how I earn most of my airline miles from CC spend. 1.25 miles per dollar is killer given the number of transfer partners they have. Major changes to the program would kill me. Starwood taking over Wyndham (and not the other way around) may not be so bad because I wouldn’t see Starwood needing to make any major changes to the SPG program. Wyndham properties, for the most part, could just be slotted in to category 1 and 2. It could actually be a benefit because it could lead to cheaper mattress running opportunities.

    I also wonder why you don’t see all this speculation about Hyatt and pressure on Hyatt to grow? In my eyes the Starwood and Hyatt are pretty similar. Perhaps it has to do with how much control the Pritzker family still wields over Hyatt.

  3. @Lucky claims: “There does seem to be a pretty direct inverse correlation between elite benefits and the number of limited service properties a brand has.”

    Got data to support the purported direct inverse correlation or this yet more subjectivity based on personal preference for the smaller but more expensive programs in the business?

    Hilton and Marriott are huge, with significant numbers of limited service properties, and, yet, I would argue that they do offer their elite members competitive benefits…

  4. I don’t agree with SPG having limited service locations. They have plenty with Element or Aloft hotels. I also think among the big chains, SPG does limited service just as well if not better.

  5. The AmEx relationship brings an interesting angle. With the loss of Costco, as well as the current regulatory and financial pressures, AmEx would be in a really sticky situation to lose another large loyalty base (if, indeed, the program was gutted).

  6. I would love to see this happen. I travel for business (30-40 nights a year) but generally to smaller towns that only have the big 3 limited service hotels. I would love to stay at Starwood to gain points to use later but cant since there are no hotels where I travel.

  7. @Lucky What do you mean SPG doesn’t have limited service hotel?
    Aloft -> Cheap W
    Element -> Cheap Westin
    Four Points -> Cheap Sheraton
    Tribute -> Cheap Luxury Selection

  8. Well, we all know that the SPG CEO resigned. We just don’t know if he did that on his own or he was told to resign. 🙂 I am pretty sure it was the last option. One thing that you mentioned and that really diminishes my potential to earn more SPG points is the lack of “limited service” properties from SPG and Hyatt. If you travel a lot in the US and do not go to the major cities your options are limited to Hilton, Marriott and IHG. I travel across the Midwest for work (sometimes by car or air) and good luck finding a SPG or Hyatt property in those places. Also if you find a Sheraton usually you will be pretty disappointed with the quality of the hotel. That is a brand SPG really needs to do a face lift since it has gone downhill in my opinion.

  9. @DCS

    Though I haven’t had spg top status, I’ve had top status with Hyatt and Marriott, and while I think the Marriott benefits are comparable on paper (minus the suite upgrades), in practice they are far apart.

    And at lower end Marriott properties, they don’t even recognize your status at all.

  10. @Scott Bower sez: “while I think the Marriott benefits are comparable on paper (minus the suite upgrades), in practice they are far apart.”

    I can bring you a Marriott elite who’ll say the opposite…(I am not even sure why you said “minus the suite upgrades”, but if you’re thinking a Hyatt Diamond’s 4 DSUs, you should realize that a Marriott Platinum elite enjoys unlimited suite upgrade, depending on availability, just like GP DSUs)

    Anyway, the inescapable fact is that even if I concede that Hyatt offers better elite benefits, which they do not, you would pretty much have to be traveling to big cities (read: expensive) where Hyatt has a decent presence at to enjoy the benefits. What good does it do to have benefits that you cannot take advantage off because there are no Hyatt properties where you travel or vacation? That’s Hyatt’s challenge as well as main shortcoming, and to a lesser extend, also SPG’s. A merger might do either some good 😉

  11. The Sheraton brand hasn’t gone down… The Sheraton’s across the world and especially in the US have been getting a 4 BILLION DOLLAR face lift since 2008.

    Go to the new Sheratons across the globe and they are gorgeous. The brand has just been around for decades so granted some hotels in the US don’t need face-lifts and need to get gutted instead.

  12. Some Sheraton really sucks, I stayed at Beijing Great Wall Sheraton last year. Everything was so old, the TV makes me feel I went back to last century. The next day, I stayed at Beijing City Wall Marriott, everything there was fabulous ! At least in Asia, it seems Marriott properties are way way way much better than SPG properties ( St. Regis in Asia is worse than Ritz Careltn and many JW Marriott are better than Westin, at least in Asia)

  13. DCS,
    i really don’t get your animosity toward hyatt program. it seems you want to bash hyatt every chance you get.
    here is my personal experience with hyatt gold passport so far.
    i am only platinum but i get the higher floor/near elevator room 90% of the time.
    i stayed at GH shenzhen last week. without even asking, i was upgraded to deluxe room and free breakfast. and the breakfast spread was amazing. i have never seen anything that grand in my life!!!!!
    then, i spent next 6 nights in GH seoul and PH seoul. i was upgraded to deluxe room 4 nights out of 6 just for being a mere platinum. no free breakfast though but who’s complaining?
    i really doubt i would get the similar treatment at other hotel brands.
    i have 20 stays under my belt so far. can’t wait to be diamond.

  14. @steven k — You can call it what you wish but I am just telling it like it is. I am sorry that I am not dishing out the sweet things and superlatives that you are used to hearing or placing Gold Passport on a pedestal.

    Having said that, just take a look again at my comment above and show me where there is any “bashing”. See? Nothing erroneous or that is not known already.

    Lastly, I have stayed at Park Hyatt Seoul, Park Hyatt Siem Reap (twice), Park Hyatt Saigon, Hyatt Regency Montreal, Hyatt Recency Manila, Grand Hyatt Taipei, Grand Hyatt Jakarta, Hyatt Regency McCormick Place…etc…all within the last two years. Several of the stays were on revenue. I must really be a fool to be contributing so much to the bottom line of a company I “bash” or have “animosity” toward…

    …or is it that you simply got to get used to hearing different, real things about GP for a change.

    G’day.

  15. @stevenk – DCS cannot, apparently, comprehend that other people may have differing opinions and experiences than he does.

  16. What’s interesting is that Starwood owns 3% of its hotels, manages 48%, and franchises 49%, with an average room size of 287 rooms per hotel.. It therefore controls 51% of its hotels, allowing it to determine the amount and direction of its growth. However, the higher cost ($10 million +) associated with developing the majority of its hotels limits the markets and type of developers which are capable of developing new hotels. They are more dependent on individual hotel revenue growth to grow their fees.

    Hilton, on the other hand, has a much more aggressive model in which it owns 3.8% of its hotels, manages 12.2%, and franchises 84% of its hotels, with an average room size of 165 rooms per hotel. By moving to such a heavily franchised model, they are able to grow fee revenue both by growing their number of hotels at a faster rate (some of their hotels can be developed between $5 to $10 million, which opens up a greater number of markets and size of investors who can afford to develop) as well as growing revenues from existing hotels.

    It will be interesting to see how Hilton gets impacted during the next downturn if their stock price is dependent on greater growth driven by the ability to grow their pipeline so quickly the last few years. Not only will they take a bigger hit in stock price, but they will have less control to make directional changes to the program which is often needed to attract customers during bad times.

  17. This discussion and the link below just proves that the miles/points-obsessed community is very different from everyone else.

    http://www.jdpower.com/press-releases/2015-hotel-loyaltyrewards-program-satisfaction-report

    Y’all see SPG and Hyatt waaaaay down there below Hilton, Marriott and IHG?

    If you’re in the miles-points bubble and can make the comparatively small footprint of SPG/Hyatt work for you, more power to you. But for a lot of people who travel as part of their work, as opposed to “I’ll jump on this mistake fare to Beijing, and this fare war for EWR-ORY, and then get my AA EXP and then buy a bunch of LAX-PVG fares for $800 during the winter, use my EXP upgrades, and keep staying EXP for cheap”, staying in the Park Hyatt in Lubbock, TX or the SLS in Chico, CA is not an option.

  18. What Christian said. My hunch is a Starwood takeover would decrease its shareholder value long term. It could provide a windfall for Starwood execs who have change-in-control terms in their incentive plans.

  19. @Brian L — LOL. Says one who does not seem to comprehend that DCS may also have differing opinions and experiences than others.

  20. Christian’s analysis certainly sheds light on this issue, and I would be loathe to see reckless growth (that ends up with SPG having less control over it’s portfolio) given priority over sustained well managed expansion – even if it takes longer.

    The rise of limited service properties is just a reflection of the trailing edge of the economic cycle. It seems very unwise to rapidly restructure for what has gone before, rather than position for what is coming up. It seems to me SPG would be better off just increasing it’s Aloft, Element and Four Points properties or looking at acquiring just one budget brand to add to the portfolio if it wanted to add downturn protection (Premier Inn maybe) – rather than selling the farm and it’s identity.

  21. @eponymous coward — You make so much sense that I feel compelled to slightly amend and recycle the following comment that I made in a discussion on the JD Power survey, which that blog’s host had completely dismissed as useless, and this site did not even mention.

    The dismissal of this survey by bloggers, though one or two gave it a fair shake, can be explained as follows: the travel bloggers are buried so deep within their little blogosphere echo chamber, reinforcing one another’s — often erroneous — perceptions, that they get shocked when they see some of the choices that real people out there make regarding their preferred loyalty programs.

    Like most surveys, the JD Power loyalty schtick does have its issues, but the company has built a decent reputation for “surveys of customer satisfaction, product quality, and buyer behavior for industries ranging from cars to marketing and advertising firm.” Therefore, they cannot be dismissed outright as one would a lesser entity. So, people are talking about this survey, which, in fact, qualitatively agrees with my own perceptions (for example, I rate Hilton Honors — tied for first place in the JD Power survey of 16 hotel loyalty programs — much higher than the bloggers because I consider it to be a much more “mature” program). However, unless a survey places Hyatt or SPG at the top, its rating of hotel loyalty programs would not be considered credible by the loyalty/travel bloggers. I have often expounded on why the placing of Hyatt GP — a loyalty program that is, at best, a work-in-progress and was ranked 9th out of 16 by JD Power — on a pedestal is misguided, or that SPG [ranked 14th out of 16] is one of the least attractive programs because their awards are too expensive in relation to one’s ability to earn Startpoints, but this has simply been ignored in favor of the conventional travel blogosphere “wisdom”. IHG has been one of the hottest tickets of late, but the bloggers have been absolutely brutal in tearing them down. However, notice that real folks out there do seem to like IHG [ranked 4th] just fine…

    I think that some of the travel bloggers and their equally insular readers need to get out there in the real world from time to time… 😉

  22. Lucky – thanks for this heads up. In light of this would you please give us a summation of all the options for transferring SPG points and whether/not you’d be unloading some now just based on this news. Thanks.

  23. @ bobbieddie — I don’t see anything happening anytime soon, and even if it did, we’d get plenty of notice of the program changing. I wouldn’t do anything now.

  24. Wyndham has just launched a new Rewards program…perhaps that was what was needed for Starwood to consider this ‘partnership’. Now there is no distinction on points nor is there a difference in how many points it takes to stay at any property at any location…if a program like this will transfer over, staying at a higher end property will be easier to do. All points are redeemable and there are no black out dates….you all should check it out
    ,

  25. Recent articles concerning Starwood’s “baffling” behaviour and its “flamboyant and costly moves” have been intriguing to say the least. Most people are unaware that Starwood and the Board of Directors are currently on course to be investigated for corruption and conspiracy to defraud investors. Ask Adam Aron and Bruce Duncan to lift the corporate veil as they are the co-architects (along with Frits van Paasschen) of this breach of trust. Plea-bargaining with the regulators is likely before any further grandiose statements can be made.

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