Financial vacancy at new Marriott-Starwood inn

November 16, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Marriott’s $12 billion deal to buy rival Starwood opens up a financial vacancy. The transaction would create the world’s biggest hotelier, with some 1.1 million rooms globally. Marriott boss Arne Sorenson touts growth and value creation, but it isn’t evident from the figures. Amid the growing clout of services like Airbnb, the deal looks decidedly defensive.

Starwood Hotel & Resorts, owner of the Sheraton and St. Regis brands, effectively hung out a “For Sale” sign back in April. Its shares vaulted to nearly $90 apiece following that announcement. Since then, despite a drumbeat of consolidation news in the lodging industry, Starwood’s shares and those of many rivals have marched steadily downward. Marriott International has agreed to pay only about $72 a share.

The elapsed time and market movements, along with Starwood’s existing plan to offload one of its businesses, complicate the deal math a bit. In late October, media reports about potential buyers prompted Starwood’s shares to jump. Assume the undisturbed value of the stock was the closing price just before that happened, $68.55, and subtract the $7.80 a share already expected from the sale of Starwood’s Vistana timeshare business, and Marriott is paying a sub-20 percent premium worth about $1.9 billion.

Marriott anticipates about $200 million in annual cost savings. Once taxed and capitalized, these could be worth some $1.3 billion today. It’s possible Marriott is understating synergies and hoping to please shareholders with more later. The company also may be counting on its enhanced scale to wring more revenue from hotel owners and guests. Even if such potential gains do exist, there’ll be transaction costs of up to $150 million and unspecified but “meaningful” integration costs to offset them.

That means Marriott is paying more in premium than is justified by its stated savings. Meanwhile, Starwood investors have only a fairly stingy premium to fall back on. That may leave the door open for another suitor, such as Hyatt, Hilton or the Chinese companies that were previously circling. There may also be pushback from hedge funds that are checked into Starwood. As it stands, there’s little to suggest that either company is acting from a position of strength. It’s appropriate for shareholders to have reservations.

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