This Is How Marriott Could Lose Starwood to Anbang’s Investor Group

Although Marriott International successfully wooed Starwood Hotels & Resorts back with its newly revised merger agreement worth $13.6 billion on March 21, there are still a number of reasons why rival Anbang Insurance Group has the best odds for winning Starwood in the end, before Marriott and Starwood's shareholder votes take place on April 8.

Here's why:

Show Me the Money

Given Anbang's track record and what we've seen so far in its overtures to buy Starwood, it's clear Anbang doesn't shy away from spending the big bucks to get what it wants.

The group has spent a total of nearly $7 billion since 2014 on foreign acquisitions, including the $1.95 billion in cash it spent to buy the Waldorf-Astoria from Hilton Worldwide in October 2014 — the largest amount ever spent on a U.S. hotel property. Anbang is also set to close a deal with Blackstone to acquire Strategic Hotels & Resorts for approximately $6.5 billion.

Anbang is also not acting alone in its attempt to acquire Starwood; its consortium includes two well-known, and well-funded private equity firms, J.C. Flowers & Co. and Primavera Capital.

Some analysts expect Anbang to counter Marriott's recent offer with a significantly higher all-cash bid. In a note to investors, David Loeb, managing director and senior real estate research analyst for Milwaukee-based Baird Equity Research, estimated Anbang would give as much as $85 per share for Starwood, about $5 more than what Marriott has presented to Starwood (approximately $79.53 per share).

"I think Anbang is pretty likely to come back and make another offer," Loeb told Skift. "I think the door is open for that and it seems like the likely outcome at this point. If Anbang doesn't come back, it's Marriot's deal. But I think that's unlikely. I think Marriott is done."

To be clear, Marriott's new offer is much more attractive than the one it initially made to Starwood back in November, but it still might not be enough. During a call with investors on March 21, Marriott CEO Arne Sorenson affirmed that, saying, "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."

"Marriott has the benefit of paper [stock]—75 to 80 percent paper—which is tremendously powerful when you can use it, but also has limitations that you don't want; you don't want to be diluted to your current earnings," Ted Teng, Leading Hotels of the World CEO told Skift. Teng has more than 30 years of experience in the hospitality industry, and spent a large part of his early career working at Sheraton, Westin, and Starwood, including working at Starwood following the merger of Starwood Lodging, Westin, and Sheraton.

Teng's personal opinion on what's happening with Starwood right now? Anbang will win out with cash, ultimately. "On Anbang's side, you have a different currency," he said. "They have so much cash and they can stretch this thing for quite a bit."

Teng also believes Marriott will act more conservatively if another bid from Anbang come in. "It'll be a hard acquisition to swallow for Marriott if the bid goes up. I think Bill Marriott got gun shy when the company almost went bankrupt in 1992, but maybe Arne Sorenson can convince him otherwise. Still, I think the Chinese side is just going to go higher and higher because it's so close they can taste it."

Since the new merger agreement was announced on Monday, Marriott's stock has fallen, Wes Golladay, a research analyst with RBC Capital Markets noted on March 22. "I haven't crunched the exact numbers yet, but I think Anbang might have the top bid at the moment, and they could sweeten it to get Starwood to look at the deal," he told Skift. "I think its' already getting a little stretched for Marriott … their ability to push the bid further is getting diminished at the moment."

Felicia Hendrix, managing director and equity research analyst for Barclays Capital, believes you can't count Marriott out completely, however. She wrote in a note to investors on March 21, " … we would not be surprised if Anbang increased its all-cash bid. If Anbang does come back with a new offer, we will see if today's offer was a 'last and final' for Marriott. While it's tempting to believe it was, Marriott has now surprised us many times regarding Starwood."

Breaking Up Isn't So Bad, in This Case

The new $450-million break up fee agreed upon by both Starwood and Marriott is another possible clue that Starwood may be leaving the door open for Anbang and company to swoop back in, believing the consortium still has more cash to offer, a source close to the consortium noted.

If the new agreement between Marriott and Starwood gets called off, Starwood will also have to pay Marriott an additional $18 million for costs related to the merger process. So at least now, if Marriott does lose Starwood to Anbang, its gets an extra $68 million top of the initial $400 million termination fee.

"[It] makes Marriott much more indifferent between acquiring Starwood and walking away if the consortium counters with a superior proposal," Loeb wrote.

Buying Abroad

For years, a number of Chinese companies have been buying up foreign companies left and right, looking for these deals to help them diversify their portfolios and provide a stable place for them to put their trillions of money, especially as the strength of the Chinese yuan continues to wane.

Anbang is no different in this respect, and Teng believes this is an important motivating factor to consider when looking at why Anbang wants to invest in a foreign company like Starwood.

"In China, government policies have a huge impact on businesses," Teng said. "When the President of China encourages companies to make investments overseas, they do it. There's a lot of credit to be gained by being successful in the the implementation of the government policy, regardless of returns."

Furthermore, Anbang, as a company, while relatively young and inexperienced when it comes to managing hotels, has deep-rooted ties to the Chinese Communist Party. Its chairman and CEO, Wu Xiaohui, is married to the granddaughter of Deng Xiaoping, who led China as its paramount leader following Mao Zedong's death in 1976 and is credited with crafting the country's current economy. Observers of the company believe Xiaohui's political connections have helped him bring in large sums of capital from Anbang's shareholders.

Starwood's Brand Power

Sheraton, before it ever became a part of Starwood, was the first international hotel brand to enter China back in 1984 and ever since, Sheraton, along with Starwood's other brands, continues to build a reputable following with Chinese travelers, Teng said.

The level of familiarity that Chinese hotel executives have with Starwood's brands is also increased. "There have been many Chinese American or Chinese Singaporean hotel executives on the Sheraton and Starwood side that were pretty close to local Chinese companies over the years," Teng said. Teng used to oversee Asia-Pacific operations for Starwood, Sheraton, and Westin at one time. "Lots of relationships there make them feel familiar with Starwood as a company."

Unlike some of its fellow U.S. hotel competitors, Starwood also has a portfolio that skews international, and under the leadership of former CEO Frits van Paaschen, the company made Greater China a region of intense investment, especially in 2011, when it opened a new property in China every two weeks. Starwood currently has about 150 hotels — both managed and franchised — in Greater China alone, comprising approximately 12 percent of the company's global portfolio.

Some Potential Hurdles

While it's likely Anbang will make Starwood an offer it can't refuse, there are some major potential challenges that could result from an acquisition.

For one thing, Anbang's acquisition of Starwood would have to clear regulations both in China and the U.S. as well as in Canada and the European Union. Marriott's deal has already cleared those regulatory hurdles in the U.S. and Canada.

On March 22, 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.

Still, there is no known data to confirm exactly how much in assets Anbang has, although 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 $20.1 billion for Starwood and Strategic, that amounts to about 10.68 percent, give or take, of the company's assets. That number, however, could go up dramatically if Anbang increases its bid for Starwood.

And then there is the U.S. Committee on Foreign Investment (CFIUS), which oversees acquisitions by foreign companies and analyzes their potential impact on national security. CFIUS did grant approval for Anbang's purchase of the Waldorf-Astoria and at the time, serious security concerns were raised. But this time around, the situation is slightly more challenging because Anbang isn't just buying a U.S.-based hotel property — it's buying an entire corporation that operates on a global scale.

Michael Wessel, commissioner of the U.S.-China Economic & Security Review Commission, a Congressionally chartered entity, believes there may be instances where some of Starwood's properties "may be close to, or with sight-lines to critical government facilities." He told Skift that if CFIUS does find significant security issues at some of these properties, "That may or may not require certain assets to be removed from the transaction." Those properties could be sold to another chain, possibly, or government travel to those properties may be potentially limited as well.

The national security concerns raised by Anbang's acquisition of the Waldorf-Astoria in New York were such that President Obama and the Secretary of State no longer check in there. Last September, when Obama was in town for the UN General Assembly he stayed at the Lotte New York Palace, a hotel owned by a South Korean company.

Teng, for his part, thinks national security threats from foreign hotel ownership and brand management aren't as big of an issue as some may believe it to be. "I think all this international stuff like who owns what really doesn't matter," he said. "There's a separation of the owner of real estate and the management company. I think all these brands are very global and I don't think it plays into it that much."

A Clash of Business Cultures

If there's one thing Teng has observed, having been in the thick of the monumental mergers that took place between Sheraton, Westin, and Starwood, more than 20 years ago, it's this: "Culture will be the most difficult part to execute post-merger," he said. "Culture can destroy a lot of value, or it can capture it."

Teng recalled a 2005 conversation he had with Barry Sternlicht, founder, chairman, and CEO of Starwood Capital Group, and former CEO of Starwood Hotels from 1995 to 2005. "We were talking about the Starwood hotels, and we were talking about culture, and Barry said he was barely able to move the culture by a tiny little bit," Teng said. "He was very happy about the business strategies there, but disappointed with himself and with not moving the culture along with it." Three competing cultures — Sheraton's highly bureaucratic one under ITT; Westin's innovative one; and Starwood's own business culture — made it difficult for Sternlicht to incorporate seamlessly.

Whomever wins out in the end and buys Starwood will have to know how to blend different business cultures among various owners and management teams, as well as have a clear post-merger strategy.

Anbang hasn't always had the best track record when it comes to blending business cultures and keeping the management of its acquired companies. After purchasing Dutch insurance company Vivat last year, its CEO left following disputes with Anbang about his company role. After Anbang bought Delta Lloyd Bank Belgium last year, the majority of its management team left after complaints about Anbang's management style. 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.

Teng is concerned that if Anbang is successful in acquiring Starwood, it may not have a fully developed post-acquisition strategy in place, especially because it doesn't have much hotel management experience.

"Look at Jin Jiang's acquisition of Interstate Hotels & Resorts back in 2009," Teng said. "They haven't had a lot of success in terms of technology transfer, and moving that knowledge into China. It hasn't taken off. There isn't a strategy behind it; there are good indications, but they don't have the post-acquisition strategy to create value."

That post-merger strategy, something Marriott has been working on since its agreement with Starwood was formed back in November 2015, remains Marriott's biggest advantage over Anbang right now, along with its hospitality expertise and the competitive strength of a combined company to battle online travel agencies and amass a powerful database of loyalty program guests.

If Marriott does somehow prevail over Anbang in winning over Starwood, however, there's still a chance for Anbang to get a piece of Starwood's $4 billion in real estate, which falls in line with Marriott's plans to sell off Starwood's assets if and when their deal closes.

For now, Anbang and company has until April 8 to make its next move, and it's likely that whatever it may be, this power play for Starwood is far from over.

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