Skift Take

Recent reports alleging that Marriott has "buyer's remorse" about the deal, while scintillating, don't seem very logical when you think of all the effort both Marriott and Starwood have put into making this deal a reality.

While it seems like we’re in double-overtime when it comes to the completion of Marriott International’s $12.2-billion acquisition of Starwood Hotels & Resorts, both companies insist that (1) this deal is still going to happen and (2) it’s just taking a bit longer than they would have originally hoped.

On Aug. 19, an article in the New York Post cited an unnamed source as saying Marriott had “remorse” over the deal, which would create the world’s largest hotel company. It also reported that Marriott is concerned that Starwood isn’t selling its real estate assets quickly enough and the integration of both companies’ loyalty programs would be difficult to pull off.

Skift reached out to both Marriott and Starwood for comment, and neither company would address the claims made in the Post’s article.

However, an internal note from Starwood CEO Thomas B. Mangas, obtained by Skift, makes it clear that he does not believe the deal is in any danger of being terminated.

Mangas wrote, “We are confident that our merger will close” and he also attached a note from Peter Cole, Marriott’s Head of Integration, which was sent to Starwood’s leadership team on Aug. 22 as evidence. He said of Cole’s note: “… There is no question Marriott is excited as ever to build the best hospitality company in the world with us.”

Skift also reached out to David Katz, managing director of Telsey Advisory Group, who was quoted in the Post’s piece.

Katz said he has “not gotten any indications at any time from anywhere that the company [Marriott] is having buyer’s remorse.”

Another analyst whom Skift reached out to for comment, David Loeb of R.W. Baird, said he had not heard anything about Marriott wanting an exit strategy from the deal.

Also, if either party decided to terminate the deal at this point, they would owe each other millions. If Starwood were to break off the deal, it would have to pay both a $450 million termination fee plus up to $18 million for any expenses incurred by Marriott in connection with the merger. If Marriott were to walk away, it would owe Starwood a $400 million termination fee.

What’s Taking So Long, Then?

The quest to close this deal, which was first announced in November 2015, has not been without its many roadblocks, from the unexpected bidding war with China’s Anbang Insurance Group and its consortium this March to the current antitrust approval process with the Ministry of Commerce of the People’s Republic of China (MOFCOM).

Currently, China is the only country standing in the way of formally closing the deal, and on Aug. 8, MOFCOM asked both companies for an additional 60-day period, called Phase 3, to review the merger for antitrust clearance.

Skift spoke to a number of antitrust experts who believe that while this isn’t necessarily an unusual move, because China is involved, there are some red flags, so to speak. For one, China’s antitrust practices aren’t quite the same as those in other countries like the U.S. or EU. Secondly, the country has been known to look for concessions from international mergers, so it’s possible this extended review process could be a part of those plans.

“My strong suspicion, without having any inside information, is that the Chinese are looking at this deal as a way for them to get some kind of major assets in a divestiture to some Chinese company,” Thomas J. Horton, a professor of law and a Heidepriem Trial Advocacy fellow at the University of South Dakota School of Law, told Skift.

However, both Marriott and Starwood have emphasized that they do not believe the antitrust clearance from China will pose any issues with regard to completing this deal.

A Marriott spokesperson told Skift, “The board and management of Marriott International are looking forward to integrating the companies once the approval from China is obtained. MOFCOM has asked Marriott to extend the time period for them to complete their review of the transaction. This request for more time — up to 60 days, potentially until Oct. 8 — is not uncommon with a transaction of this size. Marriott continues to believe that the planned merger transaction poses no anti-competitive issues in China and we are looking forward to closing promptly following Chinese regulatory approval.”

In his note to employees, Starwood CEO Mangas said, “While the timing of the antitrust review process in China is out of our control, I want to reiterate that an extension into Phase 3 is not unusual for a transaction of our size. We are confident that our merger will close, and we continue to work with Marriott to ensure MOFCOM has the information it needs for their review and that we prepare for a successful future together.”

The Long and Winding Road to Creating the World’s Largest Hotel Company

Given the fact that this merger, when finalized, will create the world’s largest hotel company, it’s no surprise that there would be some challenges along the way.

The combination of both hotel companies would create a single entity with nearly 30 different brands and 1.1 million rooms spread out over 5,500 properties around the world.

Already, travel management companies and corporations are bracing for the potential impact of a combined Marriott and Starwood, knowing that the new company would have unprecedented negotiating power and scale.

And as the Post article noted, many of Starwood’s loyal Starwood Preferred Guest (SPG) program members have expressed concerns about the future of their loyalty points post-merger.

Marriott CEO Arne Sorenson has said that SPG will eventually be rolled into Marriott Rewards and that loyalty was one of the top reasons why Marriott decided to buy Starwood in the first place.

On April 1, during an interview with CNBC, Sorenson said, “The most important thing for us to succeed at is the loyalty program. You’ve got, with SPG and Marriott Rewards, two big groups of very loyal customers. We’ve got to make sure you’re enthusiastic about the changes. I think we can make sure the benefits stay the same if not get better and offer them a broader selection of places to stay.”

There’s also the question of what that $250 million in synergies entails when it comes to job cuts at Starwood. As far back as December, Sorenson said the job cuts would begin at the top and with Anbang’s intervention, the golden parachutes that the very top Starwood execs will receive once the deal is closed were made that much sweeter.

Katz said that he is still optimistic about the closure of the Marriott-Starwood deal and that, from his viewpoint, the biggest risks or challenges for the companies involved relate to the overall integration process and the current health of the economy and the hotel market.

“We are positive on the prospects for the deal, assuming the market holds up and they can sell the real estate they are acquiring from Starwood,” Katz added. “The deal certainly bears risks and the longer than expected regulatory approvals are among those risks.”

Pursuing an asset-light strategy like Marriott’s is already on Starwood’s agenda. As part of the Marriott deal, it spun off its timeshare business to Interval Leisure Group in May. On Aug. 19, Starwood also announced the sale of the Hotel Goldener Hirsch, A Luxury Collection Hotel in Salzburg, Austria, for $22 million to the WILD Group.

Even with the challenges of selling Starwood’s real estate assets in a slow-growth economy, Katz said he thinks this is a good acquisition for Marriott overall, if things go as planned.

He pointed to Telsey Advisory Group’s most recent opinion on the deal, saying that, “from a strategic and financial perspective, this is a significant opportunity.” He added, “In short, we’re confident Marriott can control what it can control, but not what it can’t, which results in our appropriate caution on the shares.”

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Tags: marriott, marwood, mergers and acquisitions, starwood

Photo credit: Rumors that Marriott wants out of its $12.2 billion acquisition of Starwood don't seem to be adding up.

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