This morning we learned about a potentially massive roadblock for the merger between Marriott and Starwood, which has been underway since last November.
Today’s announcement came after Monday’s news that a Chinese investor group made a superior bid for Starwood. This morning Starwood accepted their offer of $78 per share of stock, which means that for the time being the Marriott merger is off. However, Marriott can also make a counter-offer, so the more likely scenario is that we’ll see a bidding war here.
This is obviously a very confusing period for shareholders, employees, and customers. Following this morning’s announcement, Starwood’s CEO, Tom Mangas, sent the following letter to Starwood associates (I’ll post it in full, and then share my thoughts below):
Dear Associates,
We just issued a press release (attached) announcing that Starwood has received a revised binding proposal from the consortium consisting of Anbang Insurance Group, J.C. Flowers and Primavera Capital that Starwood’s Board of Directors has determined constitutes a “superior proposal” as defined in Starwood’s merger agreement with Marriott. This is a fluid, live process which is garnering worldwide press attention and has important implications for our people. Therefore I thought it would be helpful to provide you with some context:
- As Starwood’s Board has determined that the consortium’s proposal constitutes a “superior proposal,” the Board intends to terminate the Marriott merger agreement and enter into a new definitive agreement with the consortium, which, in addition to Anbang, also includes J.C. Flowers & Co. and Primavera Limited.
- Our merger agreement with Marriott gives them the right — until 11:59pm ET on March 28, 2016 — to negotiate revisions that would make it as good as or superior to the consortium’s proposal. While we cannot speculate what Marriott will do, Starwood will negotiate in good faith with Marriott during this period and our Board will consider in good faith any changes they propose.
- It’s important to note that Starwood is not permitted to enter into the binding agreement with the consortium — or terminate the Marriott agreement — until the negotiation period with Marriott has concluded on March 28, during which Marriott will have the opportunity to propose revisions to our existing merger agreement with them.
- Given these new developments and the resulting need for Starwood to be able to provide sufficient time for the filing and mailing of additional information regarding these developments to its stockholders, we are postponing our stockholder vote, which was scheduled for Monday, March 28th, to a new date to be determined after consultation with Marriott. Starwood’s Board has not changed its recommendation in support of Starwood’s merger with Marriott.
This is a complicated process that is unfolding in real time and we’re all working swiftly to reach resolution. We hope to have more news to share soon. In the meantime, let’s continue to do what we do best, win in the market place and delight our guests — I’ve been so impressed by our team’s ability to stay focused despite the noise.
Regards,
Tom
In terms of concrete information in the letter, we know that Marriott has until March 28 to submit an offer which is as good or superior. What the board considers to be “superior” will be interesting, since I doubt it will be an all cash offer. So there won’t be anything concrete until March 28, meaning until then Starwood won’t enter into a binding agreement with the new bidder, and won’t formally terminate their agreement with Marriott.
What’s also interesting is that they say that Starwood’s board has not changed their recommendation in support of Starwood’s merger with Marriott.
As I said earlier, as a consumer I’d rather see Starwood taken over by this investor group than by Marriott. Consolidation isn’t good for consumers.
At the same time, Starwood has been looking to be taken over since early last year, given that they’ve been underperforming. If they’re simply taken over by a Chinese investor group, there’s a chance they’ll let them more or less maintain the status quo.
That doesn’t solve any of the “problems” Starwood has, though. At the same time, there’s a good chance the investor group is fine with that — after all, it won’t be a publicly traded company. For them, this purchase may largely be about diversifying assets. Even though Starwood might not be performing that well compared to other hotel groups, it may still be performance which this investor group is happy with, since it’s at least a fairly stable investment.
I’m curious where Starwood’s current management team stands on this. Obviously the very top of management is usually compensated very well during takeovers, but what about those slightly lower on the totem pole? On one hand I assume they want to keep their jobs, while on the other hand they may very well have big incentives for the Starwood and Marriott merger to close, which might not be there if it’s a straight takeover from a Chinese investor group.
Bottom line
It’s probably going to be a bit over a week until we know substantially more. As a consumer consolidation isn’t a good thing, so I’m rooting for the Chinese investor group to come out ahead.
It’ll be very interesting to see how this plays out…
My gut tells me that the the Chinese investor group may come out victorious. They can likely justify overpaying for Starwood more than Marriott can. They paid $1.95 billion to buy the Waldorf Astoria New York, so they’re no strangers to overpaying…
Once again the naive foreigners are being bilked by Yankee ingenuity. The Japanese squandered all their wealth from the 80s on buying overpriced US companies and then crashed and have been stuck in a depression for 20 years (the depression is so bad that their young dont want to have children anymore and the Japanese race is dying off). Now the Chinese are falling for the same . The house always wins and remember when...
Once again the naive foreigners are being bilked by Yankee ingenuity. The Japanese squandered all their wealth from the 80s on buying overpriced US companies and then crashed and have been stuck in a depression for 20 years (the depression is so bad that their young dont want to have children anymore and the Japanese race is dying off). Now the Chinese are falling for the same . The house always wins and remember when it comes to the global economy USA is the house (the house prints the casino tokens/USD)
@tara I bet you are a big-time Donald Trump supporter.
@tara It is just business.
That snake JC Flowers is again the hand under the skirt. Doesn't matter if its a struggling bank or an undervalued hotel chain, the bid manipulation for quick gain and flip is in full force. It's like a pump and dump on an organizational level. How he and Soros have robbed our country blind is beyond comprehension.
We have enough Chinese owned companies. I'll pass on Starwood then. The Chinese buy up our assets, ship jobs overseas, drop their babies on our soil so they can have all of the benefits of citizenship, and dump all of their cheap crap products in the stores (and on eBay) for stupid people to consume like junkies using heroin. The big picture for the US is not pretty.
@tara thanks.
@Nik et al. There is a difference between franchised and managed hotels, though in both cases Starwood does not own the real estate. They, like all the chains, still own a few key properties.. All of the key flagship international properties are managed by Starwood; some of the brands, ie St Regis, do not have a franchise model; they are all managed by Starwood. Despite Anbang's purchase of the Waldorf=Astoria in NYC from Hilton Worldwide,...
@Nik et al. There is a difference between franchised and managed hotels, though in both cases Starwood does not own the real estate. They, like all the chains, still own a few key properties.. All of the key flagship international properties are managed by Starwood; some of the brands, ie St Regis, do not have a franchise model; they are all managed by Starwood. Despite Anbang's purchase of the Waldorf=Astoria in NYC from Hilton Worldwide, Hilton is still managing the hotel. A little strange if Anbang succeeds in the bid with Starwood, but not unusual. Blackstone own many diversely branded hotels, while still maintaining a 50% stake in the global Hilton corp.
There was a lot of speculation at Starwood Corporate, who would stay and who would go under the Marriott merger, as effectively there is a lot of duplication and Marriott would look to gain synergies. With the new investor, I would speculate there would be fewer redundancies.
In any case, I agree with Ben that more consolidation is a bad thing--it will be interesting to see how this unfolds.
Dumb question: how will this affect hilton? I mean their high end hotels are waldorf astoria branded.. I am not sure the sec would take to kindly to a foreign investor heavily involved in two hotel companies, even if it is just by name..
So will Starwood's new ads end in "Love you long time"?
Lucky -- I think you're putting undue emphasis on the portion of the letter that says the board has not changed its recommendation with respect to the Starwood offer. That is almost certainly because that would be a breach of their contract with Marriott. It appears at the moment that the only authority that Starwood's board has is to declare the offer superior, triggering Marriott's right of first refusal. But the letter makes it very...
Lucky -- I think you're putting undue emphasis on the portion of the letter that says the board has not changed its recommendation with respect to the Starwood offer. That is almost certainly because that would be a breach of their contract with Marriott. It appears at the moment that the only authority that Starwood's board has is to declare the offer superior, triggering Marriott's right of first refusal. But the letter makes it very clear what the board will do if Marriott does not match or exceed the offer: "the Board intends to terminate the Marriott merger agreement and enter into a new definitive agreement with the consortium . . . ."
This letter was very carefully drafted to ensure compliance with the terms of the Marriott agreement. Where this gets messy is if Marriott comes forward with a new offer that is not an apples to apples comparison, that Marriott declares is "as good or superior" as the consortium's offer. If Starwood and Marriott disagree about what is "as good or superior," this thing would be destined for litigation, although we don't know what's in the agreement. It might call for an arbitrator to decide that question in a steamlined procedure, or it might give either Marriott or Starwood the right to some sort of presumption that an offer is not (or is) "as good or superior."
In short, don't get hung up on the portion that says that Starwood's board hasn't yet pulled its recommendation to shareholders. It probably can't, and it was trying to make very clear in this letter that it understands it's contractual responsibilities. But that doesn't mean that Starwood intends, even after March 28, to adhere to that recommendation, which it clearly is saying it won't unless Marriott ponies up.
@Tony -- By the same token, if the Marriott-Starwood deal goes through it would the Blackstone Group going after Hyatt ;-)
If the Marriott deal falls through, it will certainly be good for Starwood loyalists. However, if Marriott is determined to get bigger by acquisition, they could go after Hyatt. You can say it's mostly family owned and they won't sell, but as we all know, money talks.
"Tip of the hat to The Points Guy"
@Lucky @Ed Outside of the political motivations behind this, I think the insurance company saw, and sees, the following:
1. Solid income stream from franchise and royalty fees from franchisees
2. Growth in China and India. For all the talk about their respective economies slowing down, there's still a HUGE unmet demand for flags of all levels in these respective countries.
3. For the immediate future, it's a safe investment
@Nik @ Lukcy interesting that most of the properties are franchised, didn't realize that. In which case the income may be of more interest as you note. If the stability of the insurer is threatened from too much rapid growth worldwide and too many claims in the insurance business, then they won't be able to invest more in new properties around the world which could reduce the quality of the SPG brand potentially. The political...
@Nik @ Lukcy interesting that most of the properties are franchised, didn't realize that. In which case the income may be of more interest as you note. If the stability of the insurer is threatened from too much rapid growth worldwide and too many claims in the insurance business, then they won't be able to invest more in new properties around the world which could reduce the quality of the SPG brand potentially. The political connections are interesting as that can change quite quickly. The next week will be interesting to watch!
@Ed, agree with the concern re: the insurer's stability. it's probably more political than financial - Anbang execs have great connection to the country's top political figures/families which seems to be a major factor for the firm's rapid expansion in recent years. we'll see how long that tie will last...
Chinese insurers are looking for investments in real estate assets and they view the Starwood purchase as a good opportunity to get into the hotel business and not just own the buildings. In a low interest rate environment this is an interesting opportunity for them, the question that I have is what happens if the insurer has a financial problem and the impact for Starwood. Anbang is a very new insurance company and their owner...
Chinese insurers are looking for investments in real estate assets and they view the Starwood purchase as a good opportunity to get into the hotel business and not just own the buildings. In a low interest rate environment this is an interesting opportunity for them, the question that I have is what happens if the insurer has a financial problem and the impact for Starwood. Anbang is a very new insurance company and their owner wants to be China's next Warren Buffett but who knows... I'm not in favor of Marriott acquiring Starwood and had hoped it would have been Hyatt doing the acquisition.
Aren't many Starwood properties franchised out these days?
I know that's the case with a majority of Wyndham's flags.
@ Nik -- Yep, they own very few properties.
God willing and the creek don't rise that Marriott walks away and leaves Starwood alone.
If Anbang ends up running Starwood like Geely is currently running Volvo, I think the brand(s) will be just fine, if not better.
Make the Chinese pay more.
Perhaps relief for Marriott....and sweet $400mil breakup fee.