Microsoft Word - Ma
iott Starwood V1.docx
C o p y r i g h t XXXXXXXXXX S t e v e n F e r r a r o - N o p a r t o f t h i s c a s e m a y b e r e p r o d u c e d ,
s t o r e d i n r e t r i e v a l s y s t e m s , u s e d i n a s p r e a d s h e e t o r t r a n s m i t t e d i n a n y
f o r m o r b y a n y m e a n s - e l e c t r o n i c , m e c h a n i c a l , p h o t o c o p y i n g , r e c o r d i n g ,
o r o t h e r w i s e – w i t h o u t t h e p e r m i s s i o n o f t h e a u t h o r .
Ma
iott International’s Acquisition of
Starwood Hotels & Resorts
Worldwide
In April of 2015 Starwood Hotels and Resorts began a process to maximize shareholder
value by considering divestitures, a leveraged recapitalization, acquisitions, or an
outright sale of the company. After engaging no fewer than 10 companies about
possible mergers or acquisitions, Starwood’s board of directors determined that
Ma
iott, one of the early suitors who initially withdrew interest, was the best partner.
Announcement of Ma
iott’s acquisition of Starwood was made public on November 16,
2015.
This case is developed solely for the basis of classroom discussion and is not intended to
serve as an endorsement, or to illustrate effective or ineffective management.
Fall 15
08 Fall
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
1
Introduction
On November 16, 2015, Ma
iott International, Inc. (MAR) and Starwood
Hotels & Resorts Worldwide, Inc. (HOT) announced that the boards of both
companies had unanimously agreed to approve the acquisition of HOT by MAR. The
esulting entity would be the world’s largest hotel company. The combined
company’s portfolio would include Ma
iott’s strong presence in the luxury, select-
service tiers, resorts, and conventions segments as well as Starwood’s leading
lifestyle
ands and international footprint.
Under the terms of the agreement, Starwood shareholders would receive
0.92 shares of MAR class A shares and $2.00 in cash for each HOT common share.
The total value of the deal is estimated to be approximately USD $12.2 billion.
Separate from this deal, Starwood shareholders will receive approximately $7.80 for
Starwood’s timeshare business, which will be merged into Interval Leisure Group.
Starwood shareholders would own approximately 37% of the combined firm. The
agreement also requires either firm to pay the other a $400 million
eak-up fee if
an alternate transaction is pursued or if one of the parties declines to complete the
deal.
Arne Sorenson, CEO of Ma
iott will remain CEO of the combined company.
Ma
iott will increase its board’s size by three to a total of fourteen.
Starwood (HOT)
Starwood Hotels & Resorts Worldwide, Inc., together with its subsidiaries,
operates as a hotel and leisure company worldwide. The company owns, operates,
and franchises luxury and upscale full-service hotels, resorts, residences, retreats,
select-service hotels, and extended stay hotels under the St. Regis, The Luxury
Collection, W, Westin, Le Méridien, Sheraton, Four Points, Aloft, and Element
and
names. It also develops, owns, and operates vacation ownership resorts; and
markets and sells vacation ownership interests in the resorts, as well as provides
financing to customers who purchase such interests. In addition, the company
develops, markets, and sells residential units at mixed-use hotel projects. As of
October 1, 2015, the company developed, owned, and managed retail, office, and
industrial properties that included approximately 9 million square feet of
commercial space; had a portfolio of 39 hotels totaling approximately 5,400 rooms;
and offered property management services to 17 apartment communities. The
company was founded in 1969 and is headquartered in Stamford, Connecticut.1
1 http:
finance.yahoo.com/q/pr?s=HOT+Profile
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
2
Starwood began their “asset light” divestiture program in 2000. The goal of
the program was to transform Starwood from an asset heavy, real estate holding
company that owned hotels to a hotel management company that “owned
elationships.” The expected results from the program included a high ROIC, lower
capital requirements, higher margins and less cyclical profits. Between 2000 and
2014, Starwood had transitioned from a company where only 17% of its revenues
were fee-based, to one where 80% of the revenues were fee-based. However, while
ROIC and margins had been noticeably higher in 2012, 2013, and 2014, revenues
had begun to taper off. The decline was noticeable in the analyst community as well
as among Starwood’s peers.
In April of 2015, Starwood announced the beginning of a strategic
exploration to maximize shareholder value. Robert LaFleur, an analyst at JMP
Securities noted that Starwood’s Sheraton
and had been struggling recently. “One
of the reasons Starwood went on this review to begin with was the Sheraton
and.“
Starwood hired Lazard and Citi to review strategic alternatives. These alternatives
included continued divestitures in pursuit of Starwood’s “asset light” strategy, a
leveraged recapitalization, selling Starwood outright, or acquiring or merging with
another company.
Between April and August Starwood engaged 10 lodging companies, and
investors in lodging companies, in an effort to find the best strategy for going
forward. Bidder’s per share offers ranged between $79.00 and $86.00. Many of the
offers were all cash offers, but some were a combination of cash and stock where
the stock portion ranged between 70% and 97.50% of the total offer. Following the
acquisition announcement, LaFleur noted, “If there’s anyone who can fix [the
Sheraton Brand], it would be Ma
iott. I think it will take a couple of years for these
companies to realize these synergies
oadly.”2
Ma
iott (MAR)
Ma
iott International, Inc. operates, franchises, and licenses hotels and
timeshare properties worldwide. It operates through three segments: North
American Full-Service, North American Limited-Service, and International. The
company also licenses the development, operation, marketing, sale, and
management of vacation ownership and related products under the Ma
iott
Vacation Club, Grand Residences by Ma
iott, The Ritz-Carlton Destination Club, and
The Ritz-Carlton Residences
ands to the Ma
iott Vacations Worldwide
Corporation. In addition, it operates, markets, and develops residential properties,
as well as operates and franchises hotels and resorts; and provides services to
home/condominium owner associations. As of December 21, 2015, the company
had approximately 4,300 properties in 85 countries and te
itories. Ma
iott
2 Ma
iott to Buy Starwood Hotels, Creating World’s Largest Hotel Company, DealB%K, New York
Times, November 16, 2015.
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
3
International, Inc. was founded in 1971 and is headquartered in Bethesda,
Maryland.3
The Industry
Rumors had persisted for months that Starwood was talking to multiple
potential acquirers; including three Chinese companies, InterContinental Hotels
Group, and Hyatt Hotels, as it began exploring various value maximizing strategies
in April 2015. Ma
iott was not considered to be among this group after it
completed its strategic review in April 2015. Ma
iott Chief Executive Arne
Sorenson stated that they “jumped in and took a quick look at the [Starwood]
information that was available – and initially were not very interested.” However,
over the next seven months Ma
iott became more and more impressed by what it
could do if it were bigger.4 Size began to matter more to Ma
iott as it considered
what had been happening in the industry during the past two or three years.
Sorenson continued “whether you look at what some of the OTAs [online
travel agencies] have done in their space, the Alibabas and the Googles of the world
and what they’re doing in the travel space, and the home sharing space… watching
all of that, we thought strategically we could drive better value and better compete
y being bigger.” The conclusions that bigger is better is driven by the recent
success and rapid expansion of home-rental companies like Ai
nb Inc., as they
force established hoteliers to increase their global footprint or risk losing market
share to these smaller, more nimble competitors. Another advantage to being a
large hotelier is the negotiating leverage size produces with travel agents like
Priceline Group’s Booking.com and Expedia Inc.
Scaling up in the industry was becoming more and more important as these
other members of the travel and lodging community were becoming larger
themselves.5 The Blackstone Group LP had recently completed two large, high
profile acquisitions. In May 2015 they purchased three high-end resorts: the JW
Ma
iott Phoenix Desert Ridge, the Orlando Florida JW Ma
iott, the Orlando Florida
Ritz Carlton. On September 8, 2015 Blackstone Group LP agreed to buy Strategic
Hotels & Resorts for approximately $4 billion, adding luxury properties such as The
Essex House in Manhattan and the Ritz-Carlton in Half Moon Bay CA. Travel
ooking agencies were also growing by acquisition. Expedia recently purchased
vacation rental site HomeAway for $3.9 billion and O
itz Worldwide for $1.6
illion. Rival Priceline bought OpenTable for $2.6 billion in June 2014 and Kayak in
2012. Analysts at Keller Capital indicated that the mid-sized hotel companies, such
3 http:
finance.yahoo.com/q/pr?s=MAR+Profile
4 Ma
iott CEO: We Were “Compulsive” About Keeping Starwood Deal a Secret, Fortune, November
16, 2015.
5 Hotels typically pay between 10% and 25% of their room revenue to online travel agents. In 2015,
approximately 17% of all hotel bookings were placed through online travel agents.
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
4
as Hyatt Hotels, Choice Hotels and Wyndam Worldwide, were likely to either
acquire other small and midsized hotels companies to get larger, or become the
targets themselves as the industry goes through a consolidation. However, private
equity groups were also showing interest in getting into the space.
Beyond size, Sorenson felt there was another compelling motive for the
acquisition. “I think in the DNA of Ma
iott is being an operating company, and in
many respects Starwood is a
and and marketing company, and if we can keep the
est of both of those, we end up with something that’s pretty strong.” However,
some analysts indicated that the timing of the deal was really driven by relative
stock price performance: Ma
iott shares had appreciated more than Starwood
shares. Moreover, the Wall Street Journal reported that while Hyatt and Ma
iott
submitted similar offers, Starwood’s board prefe
ed Ma
iott’s stock as a cu
ency
to Hyatt’s because the Pritzker family, through special shares that give it 75% voting
power, controls Hyatt.6
Expected Benefits from the Acquisition
One of the noticeable benefits from the combination of Ma
iott and
Starwood was the lack of overlapping footprints, with the exception of a few large
cities like New York. Ma
iott contended that there would be no need to
immediately start selling assets once the acquisition was complete beyond some of
those that Starwood had already identified. However, some analysts believed that
with over 30 combined
ands, some of them are likely to be sold. The main
ands
are found in the Table 1 below.
Ma
iott management listed the following expected benefits from the
acquisition:7
§ Leveraging Operating Efficiencies: Ma
iott expects to deliver at least $200
million in annual cost savings in the second full year after closing. This will
e accomplished by leveraging operating and G&A efficiencies.
§ Accretive to Earnings: Ma
iott expects the transaction to be earnings
accretive by the second year after the merger, not including the impact of
transaction and transition costs. Earnings will benefit from post-transaction
asset sales, increased efficiencies and accelerated unit growth.
6 Ma
iott Wins Battle to Buy Starwood, The Wall Street Journal, November 16, 2015.
7 http:
investor.shareholder.com/ma
eleasedetail.cfm?ReleaseID=942791
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
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Table 1: Inventory of Starwood and Ma
iott Brands
STARWOOD
MARRIOTT
Brand Hotels Countries
Brand Hotels Countries
Luxury
St. Regis 33 15
Ritz Carlton 99 36
The Luxury Collection 92 30
Bvlguari 4 3
W Hotels 46 20
Edition 4 3
JW Ma
iott Hotels 80 26
Autograph 106 26
Upper Scale
Westin 203 36
Renaissance 166 35
Sheraton 436 71
Delta Hotels & Resorts 37 1
Le Meridien 98 37
Gaylord Hotels 5 1
Ma
iott Hotels & Resorts 536 55
Select Service
Loft 91 15
Courtyards XXXXXXXXXX
Four Points 193 33
Fairfield Inn & Suites 808 3
Element 14 3
MOXY 8 3
Protea 100 8
Residence Inn 722 9
SpringHill Suites 353 1
TownPlace Suites 290 1
AC Hotels 94 10
§ Significant Capital Recycling Program: Ma
iott expects Starwood to
continue its capital recycling program, generating an estimated $1.5 to $2.0
illion of after-tax proceeds from the sale of owned hotels over the next two
years. The hotels are expected to be sold subject to long-term operating
agreements.
§ Continued Strong Returns to Shareholders: On a pro forma combined
asis, Ma
iott and Starwood generated $2.7 billion in fee revenue in the 12
months ending September 2015. In 2015, Ma
iott expects to return at least
$2.25 billion in dividends and share repurchases to shareholders. Ma
iott
elieves it can return at least as much in the first year following the merger.
Ma
iott International’s Acquisition of Starwood Hotels & Resorts Worldwide
6
§ Accelerated Global Growth: Ma
iott International expects to accelerate the
growth of Starwood’s
ands, leveraging Ma
iott’s worldwide development
organization and owner and franchisee relationships. The combined
company will have a
oader global footprint, strengthening Ma
iott’s
ability to serve guests wherever they travel.
§ Lifestyle Leader: Starwood’s first-mover advantage in the lifestyle category,
along with Ma
iott’s
oad range of
ands in this segment, positions the
combined company as a leader in the lifestyle space. With Ma
iott’s strong
owner and franchisee relationships, the combined company expects growth
of its lifestyle
ands to accelerate.
§ World-Class Associates: This combination
ings together two of the most
talented teams in the industry. Together, they will combine their innovative
ideas and service commitment to deliver unforgettable guest experiences.
§ Leading Loyalty Programs: Ma
iott Rewards, with 54 million members,
and Starwood Prefe
ed Guest, with 21 million members, are among the
industry’s most-awarded loyalty programs, driving significant repeat
usiness. They should be even stronger when the companies merge.
§ Owner and Franchisee Preference: The combined company will be able to
ealize increased efficiency by leveraging economies of scale in areas such as
eservations, procurement and shared services. Combined sales expertise
and increased account coverage should drive additional customer loyalty,
increasing revenue. We expect that these enhanced efficiencies and revenue
opportunities should drive improved property-level profitability as well as
greater owner and franchisee preference for the combined company’s
ands.
§ Commitment to Management and Franchising: Ma
iott remains
committed