Marriott International on Monday increased its offer for Starwood Hotels & Resorts Worldwide by about 15% to US$13.6 billion, a deal that Starwood has accepted, putting the onus back on China’s Anbang Insurance Group Co. to consider another counter bid.
With Marriott’s new offer, Starwood shareholders will receive US$21 in cash (from US$2, which totals approximately $3.57 billion) and 0.8 shares of Marriott for each share of Starwood (down from 0.92), which results in approximately 20 million fewer shares issued. The deal values Starwood shares at US$79.53, according to Friday’s closing prices. Anbang’s offer was US$78 a share in cash, equaling US$13.2 billion. Starwood shareholders also receive a timeshare piece, which is between US$5-6 per share.
Under terms of the new deal, Starwood shareholders will own about 34% of the combined company after the merger, down from approximately 37% in the original proposal.
Targeted annual synergies were increased to US$250 million from US$200, which results in approximately US$39 million of incremental cost savings accruing to Marriott’s shareholders; EPS is expected to be roughly neutral in 2017 and 2018 versus prior expectations of “accretive by the second year after the merger;” the breakup fee increased to US$450 million, up from US$400 million, and Starwood would now be required to reimburse Marriott for up to US$18 million of actual costs incurred by Marriott to date (both amounts total US$2.75 per Starwood share).
A shareholder vote is scheduled for April 8, “and now we wait for the consortium to counter offer, which we expect it to do,” said R.W. Baird analyst David Loeb in his morning note about the deal.
Loeb further stated that increasing leverage is the key change to the revised deal. “We have a positive view of the increased cash component and Marriott’s willingness to lever up to get this deal across the finish line; leverage is expected to be 3.6x post-closing, above the company’s 3.0x-3.25x targeted range, although by year-end 2016, Marriott expects leverage to be back within its targeted range,” Loeb said.
In an interview Monday morning from Havana, Cuba, Marriott International CEO Arne Sorenson told CNBC, “We are not making a pronounced view about whether or not another bid will come in. We think what we have teed up on the table, which Starwood’s board agreed on last night, is a compelling offer for Starwood shareholders. We want to get moving forward.”
Sorenson elaborated during the CNBC interview that in retrospect maybe Marriott’s initial bid for Starwood was too good a deal for Marriott. “We made a significant move over the course of the weekend and decided we are really very interested in the strategic power of this combined platform. Let’s put a significantly increased offer on the table, but one that can still create value for our shareholders. Starwood’s board accepted it. We’re ready to go.”
In response to a CNBC question about the Sheraton brand, Sorenson added that Marriott is committed to keeping it. “It does often get questions because there are some hotels, probably particularly in the West, not in place like China, which could use some additional capital,” Sorenson said. “And that’s why people ask. But it is broadly distributed around the world, very well known, and it is in fact growing in Asia. And we think this brand can be positioned to be stronger than it’s been in the past. We think we can improve the economics for the owners and franchisees of those hotels. We’re hoping that with the improvement of those economics they will, in fact, find it rational and reasonable to invest additional capital in bringing those hotels up to standard. And those that don’t, over time, may end up getting de-flagged or landing in some other brand position. This will be very much a multi-year project, but we think it’s one that we’re well suited to do and we are very optimistic about the growth that we can return to Sheraton both in terms of the performance of the existing hotels and the addition of new hotels in that brand.”