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Playing Defense: Analysts Say $12B Marriott/Starwood Deal Could Lead to Further Hotel Consolidation

UPDATED: Transaction Announced After Rumors of Starwood Deals With Hyatt, Chinese Firms
November 16, 2015
After weeks of reports that Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT.N) would be acquired by suitors ranging from Hyatt Hotels Corp. to several Chinese companies, HOT's $12.2 billion cash-and-stock purchase by Marriott International Inc. (Nasdaq: MAR) took the market by surprise.

The deal creating the world's largest hotel chain, with a mindboggling 5,500 hotels with 1.1 million rooms across 30 brands, is the largest M&A in the lodging space since Blackstone Group's $26 billion acquisition of Hilton Worldwide Holdings in 2007 -- and the transaction "came out of left field," acknowledged Robert A. LaFleur, hotel analyst for JMP Securities.

"Taking on this merger is an interesting move by Marriott and a departure from the incremental, steady style that has been its hallmark," said LaFleur. "Given an increasingly competitive lodging landscape, Marriott could be positioning itself to become a bigger threat."

Fitch Ratings said the deal should strengthen Marriott's ability to weather future downturns in the lodging cycle, boosting its profitability and reducing its risk profile.

Whether an intentional move or not, Marriott benefits from a defensive play in acquiring Starwood. Multiple reports indicated that Hyatt was considering a bid for Starwood, a combination that would arguably have resulted in another U.S. lodging company of similar scale to Hilton and Marriott, Fitch said.

That being said, the transaction carries some risk. Marriott and Starwood each own brands that compete head-to-head in the marketplace, including locations that would otherwise be prohibited within current franchise radius restrictions, Fitch said. The merged companies could see losses if existing Starwood and Marriott franchisees opt to re-flag their properties when contracts expire, especially if a competitive Marriott-branded property is nearby.

Interestingly, a dual-branded hotel by Marriott and Starwood broke ground Tuesday. The 18-story property in downtown Denver will be both an AC Hotel by Marriott and a Starwood-branded Le Meridien Hotel.

Starwood Chairman Bruce W. Duncan, calling the transaction a "game-changer" for the hotel industry, said Starwood is expected to sell between $1.5 billion to $2 billion in hotel asset sales within the next two years.

Executives for both companies said they would be carefully reviewing the 30 combined brands between the two, but would not comment on whether any brands would be eliminated, with Marriott President and CEO Arne Sorenson noting that companies have not traditionally purchases then broken up a portfolio of brands.

The pairing would give Bethesda, MD-based Marriott a larger presence in non-U.S. markets, as nearly 75% of Starwood's revenues are derived from markets outside the U.S.

"The driving force behind this transaction is growth," said Sorenson. "This is an opportunity to create value by combining the distribution and strengths of Marriott and Starwood, enhancing our competitiveness in a quickly evolving marketplace. This greater scale should offer a wider choice of brands to consumers, improve economics to owners and franchisees, increase unit growth and enhance long-term value to shareholders," Sorenson added.

The transaction adds such hotel brands as Westin, the W, Sheraton and St. Regis to Marriott's portfolio.Earlier this year, Starwood said it was considering strategic alternatives, including putting itself up for sale. The boards of both companies have unanimously approved the merger, which calls for Marriott to pay $11.9 billion, or $0.92 per share of Class A common stock, and $2 cash per share, total $340 million. Under the agreement, Starwood shareholders would own about 37% of the merged company.

Last month, Starwood said that it would separately spin off its time-share business, Vistana Signature Experiences, and merge it with a subsidiary of Interval Leisure Group. The $7.80 that Starwood shareholders will receive for the Vistana transaction is $7.80 a share, or about $1.3 billion, for a total consideration in the Marriott deal of $79.88.

Last month, Hyatt was said to be preparing a cash-and-stock bid and at least three Chinese firms were also reportedly in negotiations to acquire the Stamford, CT-based Starwood. InterContinental Hotels Group was also rumored to be talking with Starwood in July.

Starwood and Marriott executives told investors this morning they hope to close the transaction in mid-2016. The transaction has a $400 million break-up fee if it is not completed. Transaction and integration costs could exceed $100 million, executives for both companies said.

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