Skift Take

If you thought the drama playing out between Starwood, Marriott, and Anbang was already complicated enough, wait until you read this.

Deanna Ting, Skift

If you tried to describe what’s happened in the past few weeks with Starwood Hotels & Resorts, Marriott International, and Anbang Insurance Group, it might sound like something straight out of a soap opera: Starwood and Marriott seemingly broke off their months-long engagement when another suitor, Anbang, swooped in, just weeks before the wedding.

For now, Starwood has since decided to go back to its old beau, Marriott, but who knows how long the engagement will last, or if the wedding will still take place.

>>UPDATE: Starwood Hotels Bidder Walks Away, Leaves Door Open for Marriott

A new Starwood-Marriott filing with the U.S. Securities and Exchange Commission on March 25, combined with an earlier filing from Dec. 22, elucidates that narrative even further. In it, a much clearer picture of Anbang Insurance Group’s desire for the Stamford, Connecticut-based hotel company appears, as do the strategic moves it was willing to make in order to woo Starwood, even at the very last minute.

Here’s an overview of the path that led us to where we are now:

Starwood put itself up for sale officially on April 29, 2015, and about a week after that, Anbang made its intentions clear to Starwood. On May 6, Anbang’s CEO Wu Xiaohui called a representative of Starwood’s financial advisor, Lazard, expressing his company’s interest in a possible acquisition.

About four months later, on Aug. 29, Wu met with Starwood’s then-interim CEO Adam Aron and with current CEO Thomas B. Mangas, making a preliminary non-binding offer to buy Starwood for a 20-percent all-cash premium on its current trading price, which was $73.29 at closing on Aug. 28. At that trading price, Starwood would have been worth about nearly $12.2 billion (this is what Marriott eventually won Starwood over with in November 2015). With the 20-percent premium offered by Anbang, each share would be valued at about $88 per share, for a total of about $14.65 billion. It wasn’t clear then if Anbang’s offer included Starwood’s timeshare business, and Starwood asked for more details on Anbang’s financing plans before it could go any further in considering the offer. Both Starwood and Anbang entered into a confidentiality agreement on Sept. 2.

On Sept. 24, Wu met again with Duncan, Aron, and Mangas with yet another verbal non-binding offer of $86 per share, but again didn’t include financing details or whether this bid included the timeshare spin-off. Starwood asked Anbang for a formal offer letter.

On Oct. 27, a Wall Street Journal article reporting that one of several Chinese companies would likely close a deal with Starwood made its stock rise 9.1 percent, the biggest jump it had seen since 2009. Interestingly, Anbang wasn’t named in the article. On Oct. 28, Starwood’s stock closed at $79.50. By comparison, Marriott’s stock closed at $76.89. That jump in stock price was a wake-up call for the companies vying to buy Starwood, including Marriott and, we’re assuming, Anbang.

On Nov. 3, Aron, Mangas, and Starwood’s financial advisors again met with Wu. This time, he made yet another all-cash bid for Starwood at $83 to $86 per Starwood share, or $13.8 billion to $14.3 billion, but there was a snag in his plans. Because Anbang still hadn’t provided specific financing details to Starwood as to how this deal would be funded, Anbang had to withdraw its indication of interest before the meeting was over.

Thirteen days later, on Nov. 16, Starwood announced its merger agreement with Marriott for an estimated $12.2 billion. Under this original agreement, Starwood stockholders would receive 0.92 shares of Marriott common stock, plus $2 for each share of Starwood common stock. Click here for a closer look at how Marriott almost didn’t even buy Starwood.

And that, we thought, was it — a done deal. On March 1, Starwood and Marriott announced they’d cleared pre-merger antitrust reviews in the U.S. and in Canada. Everything seemed to be on course with the merger agreement. The shareholders were supposed to vote on March 28, and the deal was expected to close by mid-June, creating the world’s largest hotel company.

All that changed on the evening of March 10. That was when a representative from Anbang’s legal team at Skadden, Arps, Slate, Meagher & Flom LLP emailed Starwood’s Chairman of the Board, Bruce Duncan; CEO Thomas Mangas; General Counsel Kenneth S. Siegel; and a representative from Starwood’s law firm, Cravath, Swaine, & Moore LLP. In that email, Anbang and its fellow consortium members — J.C. Flowers & Co. and Primavera Capital Limited — sent an unsolicited, non-binding, all-cash takeover bid of $76 per share of Starwood, a deal valued at about $13 billion.

This time around, Anbang was more forthcoming in demonstrating due diligence, saying it was confident any regulatory requirements would be cleared in a timely manner and providing assurance that it could, in fact, finance this offer.

The next morning, Starwood notified Marriott about the email and forwarded it to them. After discussing the proposal, Starwood’s board decided to request a waiver from Marriott that would allow Starwood to further discuss the new proposal from Anbang. Marriott acquiesced, but only gave Starwood until 11:59 p.m. Eastern on March 17 to make up its mind about Anbang.

From March 13 to March 17, Starwood was engaged in talks with the Anbang consortium, and it made the news of the rival bid public on March 14. That same day, Starwood sent Anbang’s legal team a revised merger agreement and after a few days of negotiation, they came to a deal that would work for both parties.

Originally, the consortium didn’t want to pay for the $400 million termination fee that Starwood would owe to Marriott if it decided to go with Anbang. However, by the morning of March 17, Anbang was willing to reimburse Starwood for half of that termination fee if Starwood called off its November deal with Marriott. Later that night, Anbang sweetened its deal, offering $78 per share instead of $76, not including the shares dealing with the spinoff of Starwood’s timeshare business.

On Friday, March 18, Anbang officially submitted a binding and fully financed proposal with definitive documentation and a funding commitment from a New York branch of a Chinese bank. Under this deal, Starwood would operate as a wholly owned subsidiary of the consortium’s “special purpose vehicle.”

This $13.2 billion deal from Anbang’s investor group, Starwood’s board surmised, was a “superior proposal” and so it notified Marriott and then issued a press release about the board’s acceptance. Duncan and Mangas also called Marriott CEO Arne Sorenson to tell him about the board’s decision.

That same day, Marriott’s board gathered to try to come up with a game plan, concluding it was still worth it for them to try to buy Starwood. They upped the terms of the original November deal so that Starwood shareholders would now receive 0.8 shares of Marriott common stock and $20 for each share of Starwood common stock, and they wanted to increase the breakup fee from $400 million to a total of $600 million.

On March 19, after talking about this new proposal with Starwood’s financial advisors, Marriott agreed to up the cash portion of the offer to $21 per share, and lowered the breakup fee to $500 million. Starwood had hoped to get $22 per share and a 10-percent exchange ratio collar, but Marriott rejected those requests.

Later that night, presumably just before or after Starwood announced it would be the first U.S. hotel company to do business in Cuba in nearly 60 years, the board asked its legal team to talk to Marriott to try to reduce the termination fee to $450 million, with an additional $18 million to cover Marriott’s out-of-pocket expenses related to the merger agreement.

On Sunday, March 20, Marriott sent over a new $13.6 billion proposal that Starwood’s board eventually accepted because it was (1) $79.53 per share, based on Marriott’s closing stock price of $73.16 on March 18; (2) the proposed breakup fee and expense reimbursement was less than 3.5 percent of the total equity value of the deal; and (3) Starwood shareholders would now own about 34 percent of the combined company.

The very next day, right before the markets opened, Starwood and Marriott announced they would proceed with their merger agreement under the newly revised terms, and that they’d both postpone their shareholder votes until April 8. Right now, both Starwood and Marriott are communicating with their shareholders, advising them to cast their votes before 11:59 p.m. on April 7.

This Is Definitely Not the End

If anything, the new filing from Starwood-Marriott shows there’s still a chance Anbang could potentially come back with a better offer and take Starwood.

Why is that? For one, Anbang originally offered Starwood about $14.65 billion in cash back in May and in November, it was willing to pay anywhere from $13.8 billion to $14.3 billion in cash for Starwood. Shortly after news broke on March 21 that Starwood had accepted Marriott’s new offer, analysts speculated that Anbang could come back to Starwood offering as much as $85 per share and, as far back as November 2015, Anbang was willing to offer up to $86. In short, it has the cold hard cash to win in the end, if it so chooses.

Secondly, the fact that Anbang was willing to pay up to half of the original $400 million breakup fee demonstrates its further commitment to acquiring Starwood. That Starwood negotiated with Marriott to bring the new breakup fee down from a whopping $600 million to $450 million, plus $18 million in expenses, could be interpreted as Starwood leaving the door open for Anbang to come back with a bigger, better offer, too. Marriott, seeing the looming threat of another bid from Anbang, probably hoped it could keep the new breakup fee at $600 million, but it was willing to settle for $468 million instead.

The biggest challenge Anbang faced in courting Starwood was its ability to show Starwood definitive proof that it could finance its bid. It wasn’t successful last year but this time around, Anbang didn’t make the same mistake. It also secured debt financing from China Construction Bank, a Chinese state-owned bank.

That being said, there are still a lot of hurdles Anbang and its consortium face, including regulatory clearance not only in the U.S. but also in China. It also has to consider how this deal could impact its other big, pending hotel purchase of Strategic Hotels for $6.95 billion from Blackstone. And then there’s the fact that if Anbang is successful in buying Starwood, it will have to come up with and execute a clear post-merger strategy that ensures the continued success of both entities.

[An Update from March 28] On the morning of March 28, Starwood issued a press release saying it was engaged in negotiations with Anbang to consider a new, updated bid from its consortium. On March 26, after Marriott and Starwood both filed with the SEC about the terms of their new agreement, Anbang submitted an unsolicited, all-cash proposal of $81 per share, or approximately $13.5 billion.

After receiving this new offer from Anbang, Starwood’s board determined it could likely be a “superior proposal,” thus allowing Starwood to reach out to Anbang for further discussion. After reviewing the proposal over the weekend together, Anbang upped its all-cash offer for Starwood to $82.75 per share, for a total of $13.8 billion, not including the timeshare spin-off. Right now, both entities are finalizing further details related to the the bid before it becomes fully binding and fully financed.

Starwood’s board still hasn’t yet changed its recommendation about Marriott, however. Marriott released a statement shortly after Starwood’s, saying it is still committed to seeing its deal with Starwood go through because of the superior “long-term value” that a combined company would have in the international marketplace.

[An Update from March 31] In the afternoon on March 31, Anbang and its consortium released a statement saying it was no longer engaged in discussions to acquire Starwood Hotels & Resorts, effectively ending its nearly year-long pursuit of the hotel company. It said:

“We were attracted to the opportunity presented by Starwood because of its high-quality, leading global hotel brands, which met many of our acquisition criteria, including the ability to generate consistent, long-term returns over time. However, due to various market considerations, the Consortium has determined not to proceed further. We thank the Starwood Board, management team and its advisors for their efforts and support throughout this process.”

Immediate reports released after news broke suggested that financing problems may have been the cause for Anbang’s decision to walk away from a new deal with Starwood, but no exact reasons have been given for its departure.

Regardless of why Anbang ultimately decided to walk away from Starwood, it’s clear that Anbang’s relentless drive and desire to purchase Starwood had a major impact on both Starwood and Marriott. Anbang forced Marriott to re-evaluate Starwood’s worth and value to the company. It also gave a big boost to the golden handshakes Starwood’s top executives will receive if and when they are asked to leave Starwood, following the completion of a merger with Marriott.

With this news, it appears Starwood and Marriott’s planned merger agreement, as revised on March 23, will proceed as agreed upon, and each company is expected to hold its respective shareholder meetings on April 8.

Is this drama finally over? We’ll have to wait and see. As this story already showed us, a lot can happen in the course of just a few weeks.

Chronology of Marriott-Starwood-Anbang:

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Deanna Ting, Skift

March 25th, 2016 at 8:30 PM EDT

Tags: anbang, marriott, marwood, mergers, mergers and acquisitions, starwood

Photo credit: The W Hotel in Singapore. Starwood Hotels and Resorts

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