Deal for $12.2 billion would create the world’s largest hotel company
WSJ: By
Marriott International Inc. agreed to acquire Starwood Hotels & Resorts Worldwide Inc.for $12.2 billion, a surprise outcome to a heated process that involved some of the world’s largest hotel groups.
The combination would create the No. 1 hotel company globally—with more than a million rooms—and bring together 30 brands across all lodging segments, from Starwood’s higher-end W Hotels, St. Regis and Westin brands to Marriott’s limited-service offerings like Courtyard by Marriott and its extended-stay chain Residence Inn.
Starwood had been listening to sales offers for months, and a number of global players—including big Chinese companies—considered a bid for the Stamford, Conn.-based hospitality giant, according to people familiar with the matter.
It later narrowed to a two-horse race between Marriott and Hyatt Hotels Corp., with Marriott emerging as the surprise winner—an outcome in doubt as recently as late last week, when Starwood and Hyatt were putting the finishing touches on an agreement between them, according to people familiar with the matter.
Shareholders reacted with some skepticism to the bid, which represents a 4% discount to the company’s closing price Friday. Starwood shares fell 3.6% to $72.27—still slightly above the deal price, suggesting some hope that Hyatt or another bidder might re-emerge.
Marriott’s shares rose 1.4%, and Hyatt was up 3.4%.
Marriott’s deal to buy Starwood is the clearest sign yet that hospitality companies view mass scale as critical to their success at a time when the Internet is erasing old barriers to global expansion in the lodging business.
Larger hotel companies can negotiate better fees with online travel agents like ExpediaInc. and Priceline Group Inc.’s Booking.com. Rapidly expanding home-rental companies, like Airbnb Inc., are compelling traditional hoteliers to increase their global footprint or risk losing market share to these nimble competitors. Merger activity may also be heating up as the industry’s long growth spurt shows signs of slowing and companies look to expand through takeovers.
But scale comes with its own challenges, especially when it means merging two companies owning more than 5,500 properties and 1.1 million rooms combined, with a fair degree of product overlap and potential antitrust issues.
In an interview, Marriott Chief Executive Arne Sorenson said Marriott and Starwood combined account for less than 15% of U.S. hotel rooms, but others said there is significant overlap in major cities that could lead to closer government scrutiny.
In the New York City area, for instance, the two companies combined would control about 25% of the total room count, according to Macquarie Securities Group. In the Washington, D.C., area, Macquarie estimates the number would be even higher.
Both hotel groups are well represented in Western Europe and major cities in China, where antitrust concerns could also emerge, analysts said.
Some analysts said a company with 30 brands is ripe for duplication and that Marriott will have to combine similar brands or eliminate some entirely. Mr. Sorenson said he had no immediate plans to discard any brand, though he noted that there could be “some marginal places where brands are brought together.”
Marriott said Monday it agreed to pay $2 in cash and 0.92 of its own shares for each Starwood share, which would value the hospitality giant at $72.08 a share.
Starwood was in separate talks to sell itself to Hyatt, and the companies were near an agreement last week, according to people familiar with the matter. Hyatt sweetened its bid Friday after being informed Marriott had outbid it, the people said.
The two hotel groups were offering similar prices, the people said, but Starwood’s board preferred Marriott’s stock as currency over that of Hyatt, which is controlled by the Pritzker family through special shares that give it 75% of the voting power.
Hyatt agreed to changes to its governance to address Starwood’s concerns, including eliminating the supervoting shares for a period of time, one of the people said.
But Starwood remained leery of the Pritzkers’ control and felt that a combination with Marriott, which has more brands across more price points than Hyatt, would be more diversified, this person said.
In the deal announced Monday, both Marriott and Starwood agreed that either company would owe the other $400 million if it pursued an alternative transaction.
Some analysts suggested Marriott’s offer wasn’t as high as investors expected. Chad Beynon of Macquarie Securities said Starwood’s fair value was above $75, based on his earnings projections.
Hotel companies’ size is critical when negotiating fees with online travel agents, which have become a preferred booking method among the coveted millennial generation. Online travel agents last year were responsible for about 17% of all hotel bookings, according to Phocuswright, a travel market research firm.
Marriott International reached a $12.2 billion deal to acquire Starwood, creating a company with more than 5,500 properties under its banners. PHOTO: BLOOMBERG NEWS
Hotels typically pay anywhere from 10% to 25% of their room revenue to online travel agents. Big brands are able to get the best fees and drive more reservation business to their own websites.
Marriott’s deal to buy Starwood comes as the hotel industry is enjoying a five-year boom. Room rates and occupancy levels hover near all-time highs across the U.S.
But more recently, some hotel companies have lowered expectations as new supply enters major metro markets and the strong dollar discourages foreign travel to the U.S.
The combined Marriott and Starwood will boast what is expected to be the world’s largest loyalty program—a perk that remains an important driver in growing and retaining corporate business. Marriott’s program has about 54 million members and Starwood has about 21 million members, though there is overlap among the membership. Mr. Sorenson said Marriott hadn’t decided exactly how or when the company would blend the two programs.
Mr. Sorenson will remain CEO of the combined company and Marriott will increase its board to 14 members by adding three directors from Starwood.
Starwood Chairman Bruce Duncan said the deal is expected to close by middle of next year.
“That doesn’t mean someone couldn’t come in over the top” with a higher bid, Mr. Duncan said. “We are committed to what is best for shareholders.”
Implications Of Marriott Buying Starwood
WOW, WOW, WOW!
There have been rumors about a Starwood takeover for just about the entire year now, and Starwood’s CEO has even gone so far as to say that he expects Starwood to be taken over by the end of the year.
The big question has been who will take over Starwood. There have been many contenders, and at various points this year we’ve heard rumors of possible takeovers from Wyndham, IHG, and Hyatt. We’ve even heard about the possibility of Chinese investors buying Starwood, which would have almost been my preferred option, as it gave Starwood the best shot of continuing to be run independently.
Well, this came out of left field, as it has just been announced that Marriott will acquire Starwood in a $12.2 billion deal, making Marriott the largest hotel chain in the world.
Here are the basic details of the takeover, per the Marriott press release:
Marriott International, Inc. and Starwood Hotels & Resorts Worldwide, Inc. announced today that the boards of directors of both companies have unanimously approved a definitive merger agreement under which the companies will create the world’s largest hotel company. The transaction combines Starwood’s leading lifestyle brands and international footprint with Marriott’s strong presence in the luxury and select-service tiers, as well as the convention and resort segment, creating a more comprehensive portfolio. The merged company will offer broader choice for guests, greater opportunities for associates and should unlock additional value for Marriott and Starwood shareholders. Combined, the companies operate or franchise more than 5,500 hotels with 1.1 million rooms worldwide. The combined company’s pro forma fee revenue for the 12 months ended September 30, 2015 totals over $2.7 billion.
And here’s a handy diagram they made regarding the takeover:
On one hand I’m devastated to see Starwood taken over in any capacity, since I love them as an independent brand. That being said, to try and be as unbiased as possible:
This takeover is a smart move, in theory
The reason Starwood has been underperforming is because they’ve been lagging the competition when it comes to limited service properties. They have nearly a dozen hotel brands, but very few of them are limited service. Instead they mostly have “lifestyle” brands, which means they’re missing out on a big portion of the market.
Marriott, on the other hand, does really well in the limited service market (they have Courtyard, Residence Inn, Fairfield Inn, etc.), and also does well with more “traditional” brands.
So this does seem like a better fit for Starwood than Hyatt, in my opinion, where I really didn’t see any synergies, given that Hyatt also doesn’t do very well in the limited service sector.
Still, the “new” Marriott will have a total of ~30 brands, which is sort of insane. I can’t keep track of the brands from just Starwood or Marriott, let alone their combined brands.
What does this mean for Starwood Preferred Guest?
I obviously can’t offer any useful financial analysis on the takeover since that’s not my area of expertise, though I can opine on what this means for the future of their loyalty programs.
Both Marriott Rewards and Starwood Preferred Guest have very loyal followings, so what’s going to happen to the two programs?
- If there will be only one surviving program, I suspect it will be Marriott Rewards, given that it’s more than twice as large as Starwood Preferred Guest
- The transaction is only expected to close in mid-2016, so nothing will change overnight; no need to panic or hurry to burn your points
Obviously Marriott Rewards and Starwood Preferred Guest are considerably different programs. Their elite benefits are different, their points earning structures are different, and the value of their points are vastly different (I value one Starwood Preferred Guest point at roughly three Marriott Rewards points).
Nothing is going to change overnight, and I sure hope that in half a year Starpoints aren’t converted into Marriott Rewards points at a 1:1 ratio.
So how could this play out?
- It’s possible that both Marriott Rewards and Starwood Preferred Guest will continue to exist independently, much like there’s Ritz-Carlton Rewards and Marriott Rewards, even though Ritz-Carlton is part of the Marriott portfolio. There could be separate elite benefits at Starwood and Marriott properties, and they could continue to be operated somewhat independently, with some reciprocal benefits between the two groups.
- It’s possible Starwood Preferred Guest will be merged into Marriott Rewards, and perhaps a few Starwood elite benefits will trickle their way into the Marriott Rewards program. If this is the case I think we can say bye-bye to suite upgrades, as many Marriott properties have very few suites. My hope would be that Marriott at least learns a thing or two from Starwood when it comes to how they treat their guests.
- While I wish it were the case, I think it’s highly unlikely that Starwood Preferred Guest will be the surviving loyalty program. Even though I don’t personally consider Marriott Rewards to be especially rewarding, there’s no denying that they have a larger member base and also score quite well in terms of member satisfaction. I suspect they’ll take the “if it ain’t broke, don’t fix it” approach.
Bottom line
From a business standpoint I “get” this takeover. There are synergies between the two hotel groups, unlike some of the past potential takeovers we were hearing about. However, as a loyal SPG member, I’m kind of sad to see what will ultimately likely translate into the death of Starwood Preferred Guest.
We’ve seen what less competition has done to the airline industry, and I have no reason to believe it’ll be any different for the hotel industry. I wouldn’t be surprised if this leads to further consolidation among the remaining “major” hotel chains.
http://onemileatatime.boardingarea.com/2015/11/16/marriott-starwood-takeover-implications/
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