Uh Oh: The Starwood & Marriott Merger Is Back On

It sure has been an exciting week for Starwood. Last Monday we learned about an interesting development regarding the Marriott and Starwood merger, where a Chinese investor group submitted an offer to acquire all outstanding shares of Starwood common stock for $76 per share.

Marriott-Starwood-Merger-1

This represented a better value than Marriott’s offer, consisting of a combination of cash and stock. Under that deal, Starwood shareholders would receive 0.92 Marriott shares plus $2 cash for each Starwood share.

Then this past Friday we learned that Starwood reached a deal to be acquired by Chinese investor group Anbang, for $78 per share in cash. That was a huge offer, and about 20% better than what Marriott was offering.

Marriott had several days to respond with an offer, and said from the beginning they were planning on making a counter-bid. That being said, I had a hard time imagining they’d be able to top Anbang’s bid. Marriott is publicly traded and has shareholders, while it seemed like the Chinese investor group was more willing to overpay, as a means of diversifying their assets.

Well, the Starwood and Marriott merger is back on, as Marriott has just increased their offer to an estimated $13.6 billion.

Under the new offer, Starwood shareholders will receive $21 in cash plus 0.8 shares of Marriott stock for each Starwood share. Per MarketWatch, this deal values Starwood shares at $79.54, according to Friday’s closing prices. Under the deal, Starwood shareholders would own about 34% of Marriott.

But still, that share price seems rather optimistic, since Friday’s closing prices are also the highest Marriott’s stock has been in a month.

Even using that high closing price, Marriott’s $73.16 stock price would yield $78.53 per Starwood share. To me it seems like $78 all cash would be a better offer, but then again, I’m sure the board has their reasons. 😉

In theory it’s possible that Marriott’s stock will continue to rise before the deal closes, though more realistically it seems like the stock price will go down, given that Marriott is clearly overpaying for Starwood here. I’d be very surprised if Starwood shareholders walk away with more than $78 per share when this deal closes.

Marriott-Starwood-Merger

I assume Anbang can still counter and come up with a better offer, and if they can, I wouldn’t be surprised if they do. Their goal seems to be to diversify assets, even if they can’t as such do much to improve Starwood’s profitability.

Are you surprised to see Marriott come back with such a strong offer?

Comments

  1. If Anbang submits another offer, Starwood must either reject, get permission from Marriott to negotiate, or submit the offer to shareholders for a vote. It doesn’t look like Starwood’s board can outright accept another offer like they did with the first Anbang offer. Also, if Starwood pulls out now they would owe Marriott $450 million as a penalty.

    Barring an over the top effort from Anbang, it looks like the Marriott deal will go through.

  2. Marriott has to convince it’s shareholders it’s worth overpaying for Starwood. Will they be able to generate three times the original cost savings? There could be strategic considerations in addition to financial ones… this saga is far from over.

  3. Not surprising but still disappointing. I wonder if the market is expecting another round of bidding — Starwood’s stock price is up to about $80.50.

  4. Why would a company insist on cash payout over a stock/cash combination? A share shift does not account as a taxable income, whereas a cash payout is an immediate taxable income. Therefore, there are benefits to the combination of share/cash payouts in mergers. I won’t be surprised if Marriott already had a 10% ceiling on top of its offer allocated to protect further interests. Not to mention that Marriott can probably afford to overpay slightly when taken in terms of adding new properties to their already existing properties – still significantly cheaper than addition of brand new properties to their portfolio.

  5. @Jared – depending on how the transaction is structured, the share component could qualify as a “sale” for tax purposes. I’ve seen shareholders get tagged with tax liabilities for corporate mergers and consolidations many times before. As far as cash vs stock, with the former your only risks are inflation and time decay though with the latter there is broader market risk and institutional risks to account for. Many times cash is the preferred method of compensation in these situations.

  6. The point above about Amex is completely correct. Having just lost Costco, now potentially SPG…..

    They are either going to have to up their game, or consolidate.

  7. 34% holding of Marriott sounds very intriguing..for those who have worked to get Starwood where it is it would seem they’d also be interested in potential of the merged company as well.

  8. Why do people think Marriott owning Starwood is worse than a random Chinese company owning Starwood?

    I would be more afraid of an unknown, non-hotel group owning Starwood.

  9. Of course Marriott was going to counter. And Marriott will invoke all rights it has under the merger agreement to stop, or make it hard for, the consortium to succeed. The financial value of Starwood is what it is, and one can argue underpay / overpay, etc. However, the value of eliminating a major competitor is worth much more long term than the financials. Marriott will to all it can to ensure Starwood competition is eliminated. As they should. Which, of course, is why SGP and Rewards benefits will be gutted.

  10. @James – Anbang will likely come back. The Marriott proxy reveals there were two other parties (likely Chinese) in the original negotiations that had offers of $83-86/sh in cash (before additional value from the timeshare spin). One of them was most likely Anbang. They could probably go a couple bucks higher than the $78/sh they have on the table right now even after accounting for the $450MM break fee they would pay.

    Marriott on the other hand, will likely fold if Anbang comes back. MAR is now projecting neutral EPS impact in 2017 and 2018, even after squeezing out another $50MM in projected synergies.

  11. Maybe Anbang is so mad they will counter with a bigger offer, to buy Starwood and Marriott altogether!

    To the “dude”:
    Anbang was willing to shed 2b on a single hotel in NY and agreed to keep the management for 100 years, that’s the faith

  12. In case the Mariott deal goes through what is your best advice on where to transfer the Starpoints? Thx

  13. Any way this thing works out, I can’t wait to use my points on any one of the three hotels Starwoods is building in Havana…..

  14. @Another Dude – I haven’t read the merger agreement, but my understanding of the document is that Starwood is incapable of accepting another offer from Anbang without the consent of Marriott to negotiate with Anbang (don’t count on it) or submitting the offer to a vote of shareholders. The whole situation now becomes much more of a “bird in the hand vs. two in the bush” scenario.

    From the Marriott press release:

    “under the merger agreement Starwood is no longer permitted to engage in discussions or negotiations with, or provide confidential information to, the Consortium.”

    The “Consortium” being Anbang.

  15. @James…I saw that, but Sorenson also confirmed on the call today that if Anbang did come back, HOT is not barred contractually from considering another bid.

  16. perhaps the chinese are diversifying out of US treasury bills buying real assets with them. Could it be they value a hotel chain more than our debt? The offer could go a lot higher if they value the hotels much more than the dollars they are paying with.

  17. Well the Saga continues. I’m sure Anbang will counter offer. Anbang offer was fully funded according to reports meaning they have the flexibility to bid higher without hurting their financial base.

  18. @ Another Dude

    Given the no shop/no talk clause James was describing, there’s very likely a breakup fee in the current Starwood/Marriott merger agreement. That means that Anbang’s bid would likely have to be higher than the current Marriott bid by whatever the breakup fee amount is. Furthermore, Starwood’s behavior suggests that the current board prefers a merger with Marriott. If Anbang outbids, they will likely start looking into takeover defenses to thwart any proxy bids.

  19. @chasgoose – the break fee was upped to $450mm (from $400mm). The no shop clause does not preclude Anbang from coming back with another offer, which if they do, HOT board will have to consider. I think the board clearly prefers the MAR offer, but If Anbang comes back with lets say $86/sh plus spin value, it would be worth considering. The break fee would be paid to MAR separately by Anbang.

    MAR’s offer is in stock, which gives the HOT board a lot of latitude to choose, but it would be hard to justify walking away from an $86/sh offer without squeezing something extra from MAR. That puts MAR in a tighter situation because their new offer already eroded any previously contemplated accretion they had in 2018, even after increasing synergies by 25% from their original estimate.

  20. It’s hard to imagine just how SPG members are going to benefit no matter who ends up overpaying. Great for shareholders but dilution of benefits will be an inevitable consequence as the buyer seeks to make it profitable

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