This Is What Marriott Has to Do to Keep Starwood From Anbang

If you’re Marriott International CEO Arne Sorenson, you have to imagine this is going to be a busy week filled with a lot of closed-door meetings. At stake is whether or not his company can hold onto its already tenuous acquisition of Starwood Hotels & Resorts after a new, more attractive all-cash bid came in, yet again, from Anbang Insurance Group and its consortium.

This time, Anbang and its investor group made up of J.C. Flowers & Co. and Primavera Capital Ltd., are offering $13.8 billion, or $82.75 per share, in cash for Starwood. At the moment, this deal is currently non-binding and not yet fully financed, but both Starwood and Anbang are actively engaged in conversations to work out all the details.

This new bid is just one of many overtures (six, to be exact) that Anbang has made to Starwood over the course of nearly a year, as far back as May 2015. And if Anbang’s long pursuit of Starwood has shown us anything, it’s that Anbang is doggedly determined to do all it can to acquire it. The fact that Anbang outbid themselves this weekend — upping their offer from $81 per share to $82.75 per share — is also a clear sign that they are serious about buying Starwood.

“I think that was done to send a message out,” said Wes Golladay, a research analyst with RBC Capital Markets. “The fact they’re willing to pay up for this asset tells you how eager they are. You just don’t see that too often.”

Currently, Marriott says it is committed to seeing this deal through, and it issued a release on March 28, saying: “The combined company will offer stockholders significant equity upside and greater long-term value driven by a larger global footprint, wider choice of brands for consumers, substantial revenue synergies, and improved economics to owners and franchisees leading to accelerated global growth and continued strong returns.”

So now, we have to wonder: What will Marriott do? What can it do to keep Starwood? Should it still even try? If Starwood chooses Anbang over Marriott, with that deal actually go through?

Here are a few scenarios:

Marriott Could Sweeten Its Offer

As far back as November, the problem with Marriott’s offer to buy Starwood has been this: too much stock, too little cash. The original offer that Marriott and Starwood agreed upon was estimated at $12.2 billion. Under this agreement, Starwood stockholders would receive 0.92 shares of Marriott common stock, plus $2 for each share of Starwood common stock.

Indeed, Sorenson admitted as much when he led an investors call on March 21 discussing Marriott’s new $13.6 billion offer for Starwood: “In some respects, you can look back and say maybe the deal [from November] was almost too good, which is what drew in another bidder at the last moment,” he said.

Marriott’s latest deal, with an original estimated value of $13.6 billion, provides Starwood shareholders with 0.8 shares of Marriott common stock, plus $21 in cash for each share of Starwood common stock. Although the cash component rose significantly — by $19 per share — the total value of the offer is still tied to the price of Marriott’s stock, which is a bit challenging. This means that if Marriott’s stock prices fall, that will dilute the overall value of its offer.

The $13.6 billion Marriott offer was calculated on the assumption that Marriott’s stock price would be about $73.16 per share. But as of about 2 p.m. on March 28, Marriott’s stock was valued at $71.40 per share. With this value, that means Marriott’s offer to acquire Starwood is worth approximately $9.5 billion for the stock and about $3.5 billion for the cash, for a total of $13 billion. If Marriott wants its offer to remain attractive to Starwood’s shareholders, it has to keep its stock price higher than what it is now.

A lot of analysts believe Marriott just doesn’t have the financial wherewithal to offer a counterbid to Anbang at this point, however.

“I think Marriott has reached the point where the price is just no longer attractive,” David Loeb, managing director and senior real estate research analyst for Baird Equity Research, said. “The only reason to do this [counter offer] is if you believe this is going to be a benefit to your shareholders. The latest offer they made was right at the point where it still made sense, but they couldn’t push it much further.” Loeb also said he is doubtful Marriott can offer an all-cash bid for Starwood, and that even if it tried, the “financing would be prohibitive.”

Golladay also believes it’s unlikely Marriott will counter offer or be able to top Anbang’s latest bid. “They [Marriott] could try, but I don’t think they should,” he said. “I think it’s very difficult to make the numbers work. I would even say it’s a low chance that they would even counter, and with a meaningful counter, I’d say there’s an even lower chance [of that happening].”

Golladay said that if Marriott winds up paying more to top Anbang’s new proposal, Marriott’s shareholders may not see any return on their investment until 2019 or 2020. “It’s not really accretive, the more you pay. This makes it much harder to justify,” he said.

But Bjorn Hanson, a clinical professor with the New York University Preston Tisch Center for Hospitality and Tourism and a longtime former hotel and real estate investment banker, believes a Starwood acquisition could represent a “once-in-a-lifetime” opportunity that Marriott may decide is one they can’t afford to let go. “The scale of this is just unprecedented,” Hanson said. “It’s a once-in-a-lifetime transaction and so, my guess is, Marriott will come back with a counter offer.”

Why would Marriott be willing to risk spending more on Starwood? Because the long-term value of what a combined company could have, especially in terms of data and competitive leverage, is just too good to give up on.

Hanson presented an example of a large citywide convention coming to a certain town, and explained that since these gatherings are often booked out in advance as much as two to five years beforehand, they often cause compression in a city, placing a lot of demand for hotel bookings. “A company that has that information first, can adjust its pricing and marketing, to take advantage of that,” Hanson said. “The value of that kind of information, and how it gets translated is almost too hard to even quantify.” Likewise, he said, a combined Starwood and Marriott would, in some markets, have a majority of the hotels in that region, and could also know when they should lower prices if demand weakens.

That’s what Sorenson and Marriott have been alluding to, more or less, all along. When Sorenson spoke on March 21 about the combined strength of Marriott and Starwood’s brands and properties, as well as a combined loyalty program, what he was really saying is that together, they’d be able to beat the hotel competition both domestically and abroad. And they would also be better positioned to reduce the amount of commissions both are currently paying to third-party distributors like online travel agencies and travel agents.

“We’ve never had an entity this large, at a time when there’s so much big data analysis available,” Hanson said. “It’s worth more than a couple of dollars per share in value. It definitely increases their pricing power but more than that, to be able to use data in a way that’s never been used before has a couple of dollars of incremental value on its own.”

If Marriott does indeed decide to increase its offer to acquire Starwood, it would have to make it “financially superior and with a lot less uncertainty,” said Loeb. That probably means less stock, more cash. “It has to be enough, nominally, they they [Marriott] could look at it and say, ‘Look, this is really in your best interest; we think the Marriott stock you get will be better for you in the long run than just getting cash from Anbang.”

Hanson is betting Marriott will make a counter-offer and, when it does, it will be “a financial bid that’s a very small financial increment above Anbang’s, but have other transactional elements that might make the deal more attractive.”

Essentially, Starwood’s board has to ask if it’s worth having its shareholders wait longer to realize the possible upsides of a merger with Marriott, or if it’s better for its shareholders to take the cash from Anbang.

Marriott for its part, Hanson said, “has to be ready for an offer, it if wants to make Anbang’s offer a little less favorable. It also has to paint a better picture as to why this is better in the long run, the long run being at least two years from now, for Starwood shareholders that will be Marriott shareholders.”

Marriott Could Cut Its Losses and Walk Away

Marriott could also decide to put an effective end to this bidding war, which has already entered what Starwood CEO Thomas B. Mangas described as “triple overtime.” Marriott could simply walk away from the deal if Starwood decides to accept Anbang’s latest proposal.

For its efforts, Marriott would receive a $450 million breakup fee, as well as $18 million in out-of-pocket expenses related to the merger transaction. It’s not exactly the $600 million termination fee that Marriott wanted from Starwood after Starwood accepted Anbang’s new offer on March 18, but it’s still a sizable amount of money.

Hanson said that while the breakup fee is no small amount, Marriott stands to lose a lot in terms of opportunity cost if it decides to walk away from a deal with Starwood. “It’s the loss of something that could have been very positive,” he said. “When we look at the brands, there are some chain scale segment where Starwood doesn’t have a brand but Marriott does and vice versa. In the short run, Marriott could have been stronger.”

Marriott Could See How It All Plays Out

Another strategy Marriott could take is to essentially “let the chips fall where they may” and see how this all plays out. Let’s say Starwood does eventually decide to accept a superior, binding, and fully financed proposal from Anbang and company. Just because Starwood accepts Anbang’s offer doesn’t guarantee that deal will necessarily close.

As Marriott noted in its press release from March 28: “Starwood stockholders should give serious consideration to the question of whether the Anbang-led consortium will be able to close the proposed transaction, with a particular focus on the certainty of the consortium’s financing and the timing of any required regulatory approvals.”

Touché, indeed. Before all is said and done, there are still a number of regulatory challenges that need to be overcome for Anbang to snag Starwood.

First, Anbang needs to clear regulatory restrictions in its own country. Last week, an article published in Caixin, a China-based financial magazine, said that China’s insurance regulator plans to reject Anbang’s plans to buy Starwood and Strategic Hotels because it would break rules stipulating that Chinese insurers cannot invest more than 15 percent of their assets abroad.

But, as we noted previously, there is no known data to confirm exactly how much in assets Anbang has. The company claims to have total assets of 1.65 trillion Chinese yuan, or approximately $253.76 billion in U.S. dollars. Going by this data, and calculating the $7 billion Anbang has spent on foreign investments in recent years, as well as another estimated $20.75 billion for Starwood ($13.8 billion) and Strategic ($6.95 billion), that amounts to about 10.94 percent, give or take, of the company’s assets.

A source close to the consortium also told Skift that Caixin’s article was “unfounded and speculative” and that if Starwood didn’t see any validity to Anbang’s newest proposal, it wouldn’t have issued a release on March 28 saying that the proposal is likely to be superior.

We also don’t know how Anbang’s consortium is splitting up the costs for Starwood. It could be that Anbang is paying 60 percent, while the other two private equity firms are each paying 20 percent, for example. We don’t know exactly how much Anbang has in assets or how much of its own money it would be investing in Starwood.

This speaks to a larger potential problem with Anbang: the fact that we don’t know much about how it operates, how it’s structured, and what its management style is like. As noted in this Wall Street Journal article, Anbang has a complicated ownership structure and deep ties to the Chinese government. To fund its last bid for Starwood, Anbang secured debt financing from China Construction Bank, a Chinese state-owned bank.

We also don’t know how well Anbang would be able to manage Starwood, if it does succeed in purchasing it and operating it as a wholly owned subsidiary. As demonstrated by its previous acquisitions of Dutch insurance company Vivat and Delta Lloyd Bank Belgium last year, Anbang has struggled to keep management teams in place after it takes over.  A source close to Anbang’s consortium says if the group is successful in buying Starwood, that it would keep its current executive team in place, however.

Beyond getting clearance in its own country to buy Starwood, Anbang and its consortium partners also have to see if the U.S. Committee on Foreign Investment (CFIUS), which oversees acquisitions by foreign companies and analyzes their potential impact on national security, will grant them approval. CFIUS did grant approval for Anbang’s purchase of the Waldorf-Astoria but that purchase raised serious security concerns at the time. Now that Anbang is looking to buy an entire hotel company with more than 1,300 hotel properties around the world, the stakes and possible security conflicts are much higher.

In terms of clearing regulatory hurdles and having a more developed post-merger strategy, Marriott has the edge over Anbang at the moment. The proposed Marriott-Starwood merger already got regulatory approval in the U.S. and Canada, but is waiting for approval in the European Union and China. And as Sorenson’s March 21 investor call demonstrated, Marriott has been putting a lot of thought into what the combined company would be like, and how it would potentially operate.

So, potentially, Starwood could accept Anbang’s new offer, and pay Marriott $468 million for the breakup, but then it may find out that the deal with Anbang can’t be closed. In that case, there’s a chance Marriott could come back to buy Starwood with a whole new offer, without having to spend considerably more to clinch it.

“If Anbang can’t close, it would be natural for Marriott to go back to the Starwood board and say, ‘Well, what do you think now?'” said Loeb. “They’d be starting over, but they’ve already done a lot of the work.”

Or who knows? Maybe Hyatt will come back with another offer, especially since it was so close to buying Starwood last year. Last fall, Hyatt’s offer to purchase Starwood was 7.6 percent higher than Marriott’s.

For now, we just have to wait and see what kind of deal develops from Starwood’s discussions with Anbang’s consortium, and how Marriott might respond.

Echoing Starwood CEO Thomas B. Mangas’ letter to employees on March 28, it’s a waiting game at this point. Mangas wrote,  “I wish I could provide certainty on timing, but we’re all going to have to be resilient and await the outcome together. I expect you’ll be hearing from me again soon.”

We certainly think so, too.

Chronology of Marriott-Starwood-Anbang:

• Monday, March 14: Starwood Gets Takeover Bid by Consortium Led by Chinese Firm Anbang
• Monday, March 14: New Starwood Takeover Bid: The Players Behind the $13 Billion Offer
• Tuesday, March 15: Starwood Rival Takeover Bid: What It Means for Brands, Executives and Shareholders
• Friday, March 18: Starwood Accepts Anbang’s Takeover Bid, Marriott Plans a Counter-Offer
• Friday, March 18: Will Marriott Be Able to Top Anbang’s Offer for Starwood?
• Monday, March 21: Starwood Accepts Marriott’s Counter-Offer Worth $13.6 Billion
• Monday, March 21: Marriott Investor Call: This Is What We Have In Store for Starwood
• Wednesday, March 23: This Is How Marriott Could Lose Starwood to Anbang’s Investor Group
• Friday, March 25: What Marriott Is Telling Its Shareholders About Starwood the Second Time Around
• Friday, March 25: The Inside Story of Anbang’s Long Pursuit to Acquire Starwood
• Monday, March 28: Starwood Executives’ Golden Parachutes Got More Golden With New Marriott Offer
• Monday, March 28: Starwood Takeover: Anbang Raises Offer to Upset Marriott Bid
• Monday, March 28: What Starwood’s CEO Is Telling His Employees About the Sales Process