Marriott International announced this morning that it has agreed to buy Starwood Hotels & Resorts Worldwide for approximately $12.2 billion in stock and cash to create the world’s largest hotel company. Combined, the companies operate or franchise more than 5,500 hotels with 1.1 million rooms worldwide.
The merger transaction has a current value of $72.08 per Starwood share. Starwood shareholders would own approximately 37 percent of the combined company’s common stock after completion of the merger, which is expected to close in mid 2016. Transaction costs are expected to total $100 million to $150 million, and Marriott is still determining integration costs.
Prior to the big announcement, major news outlets speculated that at least three Chinese companies were vying for Starwood, while others reported that Hyatt Hotels was in talks to acquire the U.S. hotel operator.
During a conference call this morning, Bruce Duncan, chairman of the board of directors of Starwood, said the decision to combine with Marriott puts Starwood in a more competitive financial position and makes it better equipped to create long-term value for shareholders. “We’re in a business where scale and efficiencies matter,” Duncan said. “Even with our winning brand and unparalleled innovations, we realized there is opportunity for greater growth as part of a larger organization.”
Starwood first announced its plans to explore strategic and financial alternatives—including a potential sale of the company—back in April. The move occurred shortly after Starwood President and CEO Frits van Paaschen resigned and Adam Aron stepped in as CEO on an interim basis. Following the change in leadership, Starwood has taken aggressive steps to accelerate its growth, improve its brands and revenue generation, sharpen its focus on operational excellence, continue its progress toward an asset light business model, and reduce costs, Aron said. The combination of the two companies has tremendous upside potential, he added. “This makes so much sense in an industry where scale is paramount and competition takes many forms. Bringing together these two companies creates a unique platform to succeed in today’s dynamic marketplace.”
When Starwood first began its strategic review, Marriott jumped in to assess the opportunity but initially wasn’t very interested in buying the company, said Marriott CEO Arne Sorenson. In the months that followed, Marriott continued to ponder the value that could be created by bringing the companies together and decided to jump back in as the relative values of Starwood shifted, he explained. In addition to the economic piece, Marriott also saw consolidation in the OTA space, the growing strength of the Alibabas and Googles of the world, and online home-rental marketplaces gaining a larger share of the pie. “Watching all of that, we became more convinced that strategically we could drive better value and compete better by being bigger,” Sorenson said. “That really starts with things like the loyalty programs and the technology spending we’ve got to do. By being bigger, we have more resources to do that cost effectively and prioritize in a way that will really help us compete.”
Sorenson said the acquisition will not change Marriott’s risk profile. “Because we’re using stock, we’ve not levered up our balance sheet, so whether you think about economic cycles, geo-political events, or something else, we’re not taking on incremental risk for the company,” he said. “But we are getting the benefit of the synergies we think we can drive, not just on cost, but on the revenue side, which should help us on the upside perform reasonably better than we could perform by ourselves.”
Between now and the close of the deal, Starwood and Marriott have a lot of work ahead as they integrate their platforms, from technology systems to operations and personnel. In terms of loyalty programs, Sorenson said they intend to pull the best from both Starwood Preferred Guest and Marriott Rewards. “We’re optimistic we can find a way to bring those programs closer together and drive that much more power from them,” he said. “A bigger group of loyal guests, but also a deeper relationship with all of those guests.”
While it’s too soon to determine how individual brands will be positioned within the combined portfolio, Sorenson said “philosophically,” they think there is a place for each one. There could also be opportunities where some assets fit better under a different flag, he said. “That’s work that has to be done on a hotel by hotel basis with real development of brand strategy, and we’re not ready to lay out in detail today.”
This is one of the biggest deals ever in the hotel industry, Sorenson added, so he expects the transition to be a learning process. “We think there are lots of challenges in trying to break up a portfolio of brands, so it’s one of the reasons that causes us to approach this as keeping things, making them stronger, and building on them.”
