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What the Marriott - Starwood Deal Means for Both Companies (VIDEO)November 16, 2015 By: David Eisen
The Starwood saga has come to a close with Marriott—in dark-horse fashion—answering the call.
In stunning Monday morning news that recalls Blackstone Group's spectacular buy of Hilton Worldwide back in 2007 for $26 billion, Marriott International, who until now was never mentioned as a possible suitor for Starwood Hotels & Resorts Worldwide, which for months had let it known it was for sale, has acquired the hotel company for $12.2 billion consisting of $11.9 billion of Marriott International stock.
The deal is expected to close in mid-2016, the companies said. After the transaction closes, the company is expected to add three Starwood members to its board, which will expand to 14 members.
Speculation had Hyatt Hotels Corp. in position to buy Starwood. But it's Marriott, a company long admired by developers and guests alike, as the winner.
Arne Sorenson, Marriott's CEO, made mention of the fact that, up until now, Marriott had not aggressively entertained the notion of acquiring Starwood. However, a recent meeting between him and Marriott owners may have changed his tune. "Owners voiced support about an acquisition," he said.
The merger gives Marriott some 30 brands in its portfolio and more than 1 million rooms under operation. To hear it from Arne Sorenson, Marriott's CEO, the deal gives Marriott even more global reach.
"We have been in the business for a long time but Starwood is more global than Marriott is," Sorenson, who will lead the combined company, told CNBC. "It's a good thing that we will have more sources (of growth) from around the world.
"[Starwood] has done a nice job in China. They are a bit bigger in number of hotels and percentage. But the deal is not principally China focused. It's also about the power of putting Marriott Rewards and Starwood Preferred Guest together—about cheaper costs in reservations and other systems.
"We will merge as quickly as possible and run as one company."
Sorenson said all the brands now will continue to run independently, but did not have anything definitive to say about the future of the brands, and whether they would remain untouched.
One of those brands: Sheraton. "We’ve looked at the Sheraton brand as well as the other brands in the Starwood portfolio," Sorenson said. "We think the portfolio as a whole is very exciting and has tremendous potential. A few things to keep in mind about the Sheraton brand: One is that it is a truly global brand. It has significant strength."
He added that there will be a strategic review of that brand to see whether some hotels in it need to removed.
Sorenson also invoked OTA consolidation, the disruption of home-sharing sites and other non-endemic forces, such as Alibaba and Google, in the rationale for the acquisition.
"Watching all that, we thought, strategically, we could drive better value and compete better by being bigger. We have more resources to do that cost effectively. The final strokes of the deal came together quickly. We jumped in and thought it was a compelling transaction."
Specific to OTAs, Sorenson said implicitly that it gives Marriott more leverage with them. "It gives us more relevance in negotiations. It's useful in getting good terms."
The deal sent shockwaves through the hospitality community. The general consensus being that it was a shrewd deal for Marriott. "They made a very smart acquisition," Leland Pillsbury, former Marriott executive, now chairman of Thayer Lodging Group, a Brookfield Company, said. "This gives them much more leverage dealing with the OTAs and other travel intermediaries, enhances their already industry-leading rewards program with travelers, and gives them new growth platforms, such as the W brand."
Pillsbury added that there could be more deals like this down the road. "This mirrors the consolidation trend in the airline industry, and is likely not the last combination we will see among hotel companies," he said.
As it stands now, it is still a bit unclear on how the deal will impact current Starwood hotel owners and franchisees, though Sorenson said the current contracts "aren't terminable—there are no contractual triggers."
The combined Marriott and Starwood company represents more than 5,500 owned or franchised hotels with 1.1 million rooms around the world.
"Our board concluded that a combination with Marriott provided the greatest long-term value for our shareholders, and the strongest and most certain path forward for our company," said Bruce Duncan, chairman of Starwood.
Still, questions remain: How will the integration of SPG into Marriott Rewards go down? What will happen to current Starwood employees—both at the corporate and hotel level—and Starwood's Stamford, CT, headquarters?
A Baird research note commends the deal. "Overall, we expect the merger to be positive for owners in the long run as Starwood-branded hotels (particularly select-service) should have more liquidity upon sale. However, the merger could trigger unique change of control provisions and result in certain management agreements becoming terminable (potentially for Pebblebrook's and LaSalle's Starwood-branded hotels). Additionally, the merger will result in significant brand concentration in several portfolios, particularly Host's portfolio."
The sale of Starwood hotels will continue, said Adam Aron, who had been acting as interim CEO of Starwood. "In terms of Starwood selling hotels, we’ve demonstrated a good track record. Since May 1, we’ve essentially moved $800 million+ of hotel assets at attractive prices in each case. We have a number of hotels in market already, and we have a full green light from our board, pre-closing, to continue that process and full support from Marriott."
In a note to Starwood general managers this morning, Aron called the deal an inflection point for the hotel industry. Here is a partial look at the note.
"Today marks an important turning point for Starwood and for the lodging industry. For many of you, Marriott is the competitor next door, figuratively and often literally. So at first blush, this news might come as a surprise. As you learn more, we think you will agree that this is a compelling and transformative opportunity for Starwood. As many of you have experienced firsthand throughout our company’s history, consolidation creates great opportunities for our people. For you and your hotel associates, there is a real advantage to being part of a stronger and larger organization with so many career prospects the world over. Having worked side by side with Marriott’s leadership team over the last few weeks, we can tell you that Marriott has tremendous regard for what we have built at Starwood, our unique take on hospitality and—most importantly—the global talent throughout our organization.
"This is the first day of a long journey. This transaction is expected to close by mid-year 2016 so, for now, it is business as usual and we do not expect any disruption to our hotel operations. There is much to sort out as we bring our two companies together, and we don’t have all the answers today, but our intent during this process is to communicate often and clearly."