When Arne Sorenson was first asked in April about Marriott International’s potential interest in the just-on-the-market Starwood Hotels & Resorts Worldwide, he was noncommittal.
He said the deal didn’t fit Marriott’s pattern of “bolt-on acquisitions” that filled gaps in the company’s geographic footprint without overlapping the existing brand portfolio, as was the case with AC Hotels in Spain (acquired by Marriott in January 2011), Protea Hotel Group in Africa (November 2013) and Delta Hotels and Resorts in Canada (January 2015).
But then, as we now know, he and Marriott’s executive team entered into discussions with Starwood, and that answer began to change.
The first sign of that shift came on 6 May during the Arabian Hotel Investment Conference in Dubai, when Sorenson laid out four possible outcomes for Starwood. The first, not surprisingly, was an acquisition at the hands of Marriott or its chief competitor Hilton Worldwide Holdings.
He said there would be challenges. Not only was there no roadmap for a merger of such size and scope, but Starwood would prove incredibly expensive to buy.
At $12.2 billion in total consideration, Marriott’s planned acquisition of Starwood, announced Monday, indeed is pricey. (It ranks among the most expensive of all time within the hotel sector.)
What I find particularly interesting is how Marriott funded it—and how company executives have been telegraphing the acquisition for most of the year.
It started in the second quarter, when Marriott repurchased more than 9 million shares of its common stock for nearly $715 million, compared to 5.5 million shares for approximately $431 million during the first quarter.
The trend accelerated in the third quarter, when executives acquired even more shares (9.8 million) for the bargain price of $702 million. “We thought it was a stunning buy in Q3,” Sorenson said on a 29 October earnings call with analysts.
During that same call—at a time when the executives in Marriott’s boardroom all knew the Starwood deal was all but certain—one analyst asked about dialing back repurchases to preserve cash for opportunities that might emerge in the consolidation landscape.
“We are by no means over-levered,” Sorenson said. “We still have a machine that produces lots of cash, and we think we've got the ability to both be aggressive in buying back stock in the years ahead but also be aggressive in whatever opportunities pop up, if they pop up, to participate in growing our business through our use of capital.”
My, how a few days’ worth of perspective adds new meaning to that response.
In buying back shares so aggressively, Sorenson and the Marriott team weren’t undermining their chances to compete in the consolidation space. They were enhancing it. It was through those efforts they were able to pull the trigger on the Starwood sale, that vast majority of which ($11.9 billion) will be funded by Marriott stock.
All the while, the unflappable Sorenson expertly pivoted through the maelstrom of speculation that surrounded Starwood. True, Marriott didn’t aggressively go after the deal until only recently, but talks persisted on and off for almost seven months. Whenever Sorenson was asked about Marriott’s interest, however, he would highlight the challenges and obstacles and all the reasons why it would never work. And then he would leave the door open, if only by a crack.
During a second-quarter earnings call, for instance, he said executives were not looking for additional conversion brands. “I think in some respects we would continue to say that our brand lineup is reasonably complete,” he said.
But then he added, “We'll continue to kick all the tires that drive by.”
And kick away Marriott did, all the while avoiding the rumor mill and readying the company for one of the largest mergers in the history of the hotel industry—provided it closes next year as planned.
Now the hard work begins of merging two distinctly different cultures, cluttered brand platforms and complete loyalty programs.
Time for the usual stuff …
What’s making me happy this week?
Seeing the possible conclusion of the race to 1 million rooms. We originally posited the question back in March. At that time, InterContinental Hotels Group was leading the pack with 710,295 rooms, followed by Hilton Worldwide Holdings with 708,268 rooms.
If the Starwood acquisition goes through, Marriott would leapfrog both companies, propelling well past the 1-million room mark. (See stat of the week below.)
Stat of the week
1,071,096 rooms: The combined footprint of Marriott and Starwood, as of the third quarter.
(NOTE: The number does not include Marriott’s timeshares nor residential and serviced-apartment portfolios. It does not include Starwood’s pending 11th brand, which is a co-marketing partnership with Design Hotels, which Starwood majority owns.)
For those keeping score at home, that makes the planned new entity the largest in the world, with Hilton Worldwide Holdings landing a distant second at 737,922 rooms.
Quote of the week
“We’re now the world’s largest hotel operator in every chain scale that matters … the best-in-class company. … Today, size matters, but this is much more than just size, it’s about deep management talent, an impressive global presence … and a business culture that derives results through consistent execution.”
—Adam Aron, interim CEO of Starwood Hotels, during a call announcing the deal.
I wonder if he’ll be sticking around after the merger. I also wonder what the combined entity will be called. Starriott? Marrwood? Marriott Starwood Hotels & Resorts Worldwide International?
Reader comment of the week
“Some thoughts from smaller franchisee's out there might be: When will we know about our franchise relationship? What about my current license application? Will new company arbitrarily switch flags on my property? Can I expect fees and system related expenses to change? If I've been given a target date for a PIP can it be extended?”
—Reader “Drew Dimond” asking some good questions after Marriott announced its intention to acquire Starwood.
Stay tuned, Drew.
Email Patrick Mayock or find him on Twitter.
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