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This is going to be a very busy week for Starwood.

— Deanna Ting

Starwood Hotels & Resorts’ board of directors has exactly until 11:59 p.m. Eastern this Thursday to make a big decision about the future of the global hotel company.

At stake is whether or not the Stamford, Connecticut-based company will continue with its $12.2 billion merger agreement with Marriott, or whether it will accept a new $13 billion bid from a group of companies led by Anbang Insurance Group, J.C. Flowers & Co., and Primavera Capital Group.

We already know what Marriott is offering to Starwood — primarily, the chance to create the world’s largest hotel company, with 1.1 million rooms in more than 5,500 hotels, spread out over 30 brands.

If the Marriott-Starwood deal goes through as planned, it would also create the largest hotel loyalty program in the world, and it would give Marriott access to billions in real-estate assets that the company can sell.

If Starwood decides to accept this new bid, however, it would have to pay a $400 million breakup fee to Marriott.

But, what can this new offer potentially bring to Starwood, and why might it be seriously considered?

Cash Upfront

For one thing, although non-binding and highly conditional, this new offer is all cash, and sources close to the deal note that it’s an estimated 13- to 20-percent premium on what Marriott is currently offering to Starwood.

“That certainly has its advantages,” says David Loeb, managing director and senior real estate research analyst for Milwaukee-based Baird Equity Research. “Many investors prefer cash deals so they can decide whether or not they want to own Marriott stocks.”

Still, Loeb says Starwood’s board has to determine whether or not it wants to go with this cash deal or whether it wants to go with Marriott, and see how Marriott’s stock does over the long term. Stock watchers currently estimate that Marriott’s deal values Starwood at approximately $62 to $67 a share, versus the $76 per share being offered by the consortium.

“When you put all the pieces together, it’s an attractive offer, but it is non-binding and highly conditional,” Loeb notes. “Starwood stock owners are going to say ‘OK, show me the money.’ If it’s real and binding and they are willing to take some of those contingencies off the table, they might be willing to say OK.”

The players involved in the new bid, that we know of so far, are also fairly reputable. Anbang owns the Waldorf-Astoria in New York, and J.C. Flowers & Co. and Primavera Capital Group are well-known private equity firms led by former Goldman Sachs executives.

He adds, “There’s a certainty about cash. Cash is worth cash today. What is Marriott’s stock worth in five to 10 years? Today, it’s $71.04 per share today. You have to weigh those things together — weighing potential benefits and risks of allowing shareholders to get stock or get cash today.”

Loeb also says the board has to take risk arbitrage into consideration, to see whether or not investors will be able to make money off of the Marriott deal, or potentially lose money.

Stephen Boyd, senior director for Fitch Ratings, echoes Loeb’s assessments. “The board will have to weigh how credible this new bid is, and they will have to think about that offer in the context of what a combined Starwood-Marriott deal could return to investors over a longer time period if they are able to realize those synergies, and create value.”

Business as Usual

While both Marriott and Starwood have said, more or less, that it’s business as usual for both companies until the the merger is finalized, the new offer from the consortium will allow Starwood to operate as usual, and with the current executive team in place. Starwood would also get to keep its highly popular Starwood Preferred Guest Loyalty program, even though it is smaller than the Marriott Rewards program.

In November, when Starwood accepted Marriott’s acquisition proposal, Marriott cited some $200 million in synergies, or annual cost savings in the second full year after closing, in its initial press release about the deal. Those synergies could result in job losses at Starwood if and when Marriott and Starwood merge.

In December Marriott CEO Arne Sorenson said that the job cuts would start at the top. “I think we’ll find the biggest cost savings disproportionately at the higher end of the overhead structure,” Sorenson said on Fox Business.

If Starwood decides to go with the new offer, which is being led by a Beijing-based insurance company, it could also mean a continuation of the company’s previous plans to saturate the Chinese hotel market.

In 2011, Starwood, then under the leadership of president and CEO Frits van Paasschen, opened a new hotel in China every two weeks, and by the time van Paasschen left Starwood in February 2015, 60 percent of the company’s total hotel profile consisted of properties located outside of the U.S. Starwood currently has about 150 hotels — both managed and franchised — in Greater China alone, comprising approximately 12 percent of the company’s global portfolio.

Brand Strengths—and Complications

If Starwood does decide to scrap its deal with Marriott, it could potentially avoid issues that may arise with branding-related issues. Namely, the fact that some of its current franchisees may not want to continue operating under Starwood’s brand flags when their contracts expire, or the fact that some of those brands may no longer exist if the Marriott merger is finalized.

But there’s also a catch related to the Anbang deal, too, says Loeb. The biggest potential problem? Well, for one, Anbang owns the Waldorf-Astoria in New York, which is operated by Hilton Worldwide. And if Anbang’s offer to buy Strategic Hotels & Resorts from Blackstone goes through, it would own properties that are operated by Four Seasons, Marriott, Starwood, AccorHotels, and InterContinental. How would all those different brands and contracts be managed?

“This is a business where owners and brands and operators need to work pretty closely together,” Loeb notes. “That gets really complicated, really fast, when an owner is an operator of another brand’s assets.”

He points out that in 1998, Marriott sued Interstate Hotels and Patriot American Hospitality when the two companies wanted to merge and planned to convert 10 Marriott properties to Wyndham-branded ones instead. Marriott would not allow a competitor to manage its Marriott-branded hotels.

What About Marriott?

While Starwood’s board decides what to do, Marriott will have to wait and see what happens, and possibly consider revising its initial offer.

“They don’t need to do anything just yet,” says Loeb. “Marriott doesn’t have to do anything until Anbang makes a binding offer and the Starwood board feels it’s worth the risk, and they decide it’s a better deal for us. There are still a lot of things we don’t know about this deal that would impact the ability of this deal to close.”

Marriott CEO Arne Sorensen released a statement yesterday to his company’s senior leaders, saying: “We continue to believe that Marriott’s transaction with Starwood offers great long-term value for Starwood and Marriott stockholders. We have already made significant progress in clearing the transaction with competition authorities in a number of jurisdictions, including the United States and Canada. We are confident that the merger agreement we have announced is the best course for both our companies and offers certainty for Marriott and Starwood stockholders, in contrast to this last-minute unsolicited indication of interest, which is highly conditional and non-binding.”

Fitch Ratings, however, issued a release saying that it would likely revise its rating outlook for Marriott from “positive” to “stable” if Starwood were to terminate its deal with Marriott or if Marriott changes its offer from all-stock to include debt.

Fitch Ratings’ Boyd says Marriott has made “a very strong and credible case” for the merger with Starwood, citing the millions in cost savings, and more market share to fend off competition from online travel agencies and emerging threats from short-term rental companies like Airbnb.

He adds, “What Marriott has always said, and what seems logical to us is that a big reason for this merger is to enhance the loyalty program — to make it even bigger and better and keep it as best in class so they’re more capable in combatting competitors like Airbnb and other hotel companies or online travel agencies.”

In a note to investors, Baird Equity Research analysts said they “do not expect Marriott to adjust its proposal at the current time.”

A Waiting Game

Until Thursday, we’ll all have to wait and see what Starwood’s board ultimately decides —or if they’ll ask for more time from Marriott to consider this new proposal from Anbang. Both Marriott and Starwood are planning to communicate with their shareholders on March 28.

Whatever Starwood eventually decides, however, is going to be which offer is better for its stockholders, period.

“The [Starwood] board’s duty is to shareholders, to represent their interests,” says Loeb. “It shouldn’t matter to the directors if the industry is better off [with Marriott] or whether the hotel owners are better off. That shouldn’t really matter. What’s really at stake is, ‘is [Marriott’s offer] worth more?’ That’s not an easy judgement to make — it’s purely a judgement.”

Both Loeb and Boyd expect more consolidation among the hotel companies and ownership groups going forward, too, because it just makes business sense.

“There are many reasons why it makes sense for consolidation to continue,” Loeb says. “It’s about having the largest pool for the most loyalty customers and giving those customers multiple opportunities to stay at your properties around the world. It’s about technology and working with the online travel agencies, and having better access to customers so you pay less to acquire those customers. It’s about repricing software —who has the resources and money to invest in big data processing to know if the same customer is canceling and rebooking. Size does mater, and I think it will continue to matter.”

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