Los Angeles Times
11/16/15

Marriott’s Plan to Buy Starwood for $12.2 Billion Could Trigger More Hotel Mergers
By Hugo Martin

http://www.latimes.com/business/la-fi-marriott-starwood-20151116-story.html

Marriott International Inc.’s plan to acquire Starwood Hotels & Resorts Worldwide Inc. will create the world’s largest hotel company and could trigger more mergers as rivals jockey to compete.

The deal announced Monday to unite Marriott and Starwood, valued at about $12.2 billion, would create a hotel company with 5,500 hotels and more than 1.1 million rooms in more than 100 countries. The new behemoth would own 30 hotel brands including the Ritz-Carlton, JW Marriott, Courtyard, St. Regis, W, Sheraton and Westin.

In the hotel world, “it’s the biggest transaction of our lifetime,” said Bjorn Hanson, a professor at New York University’s Tisch Center for Hospitality and Tourism.

Bethesda, Md.-based Marriott has about 4,300 hotel properties in its portfolio, most of which are operated as franchises owned by private investors. Stamford, Conn.-based Starwood has about 1,200 hotels, with about half operated as franchises.

In California, Marriott has 312 hotels and Starwood has 71.

Marriott’s size and breadth after the acquisition could prompt other hotel companies, such as Intercontinental Hotel Group and Hilton Worldwide, to consider joining forces with smaller operators to avoid being outpaced.

“It will spur all the others to at least talk about mergers,” said hotel consultant Alan Reay of Atlas Hospitality Group in Costa Mesa.

The good news for travelers is likely to come when the loyalty reward programs for the two hotel companies are merged, giving members more choices to generate reward points. The Marriott Rewards program has 54 million members while Starwood Preferred Guest has 21 million.

“With 5,500 hotels, you have more places you can earn points and more places to spend them,” Reay said.

But some experts worry that the merged loyalty program would resemble the Marriott program instead of Starwood’s more generous one. A member of the Starwood loyalty program can stay at the Westin San Diego for about 10,000 points a night while a member of the Marriott Rewards program must pay 35,000 points a night at an equivalent room at the San Diego Renaissance Hotel or San Diego Marriott Marquis & Marina.

Marriott executives have yet to discuss how they might unite the loyalty programs.

“I think they are going to tread very cautiously,” said Brian Karimzad, director of Milecards.com, a website that compares travel reward cards.

The proposed deal benefits Marriott by adding several more upscale brands to its portfolio, including Starwood’s St. Regis, W and the Luxury Collection. Marriott’s largest brand is Courtyard by Marriott, a mid-priced franchise that is popular with business travelers and families.

Marriott also would expand its holdings outside the U.S., where Starwood has about half of its hotels, primarily in Europe and the Middle East. Starwood has made a push recently to expand into Asia, a region with a burgeoning middle class.

“When we look at Starwood, we see many aspects of its business that complement what we have built at Marriott,” Marriott Chief Executive Arne Sorenson told analysts in a conference call Monday.

Sorenson said the combination is expected to generate at least $200 million in annual savings, starting in the second year. Under terms of the acquisition, Starwood shareholders would receive 0.92 share of Marriott stock, plus $2 in cash, a combined value of $72.08 a share, the companies said. Starwood shareholders will also receive $7.80 a share from the spinoff of a Starwood time-share business and a subsequent merger with Interval Leisure Group.

Marriott’s stock rose 98 cents, or 1.3%, to $73.72 on Monday. Starwood shares dropped $2.72, or 3.6%, to $72.27; the stock had jumped recently on merger speculation.

A deal involving Starwood was no surprise because executives at the hospitality company have been talking to investors and hotel companies about mergers since April. The talks have been prompted by a Starwood shareholder who worried that the company has not grown as fast as its competitors.

“Starwood has been in play for a while,” said hospitality consultant Bruce Baltin of PKF Consulting. “It has not grown in recent years as much as they liked it to.”

As recently as last month, three large Chinese companies expressed interest in acquiring Starwood.

Sorenson said he doesn’t expect to eliminate any Starwood brands, but industry experts predicted that some underperforming hotels may be converted to other brands to increase sales.

For example, analyst have recently raised concerns about Starwood’s Sheraton brand. In the nine months ended Sept. 30, Sheraton hotels generated an average of $114.40 in revenue per available room per night, compared with $149.80 for Marriott’s North American hotel brands, according to analysts.

Baltin suggested that some Sheraton hotels may be converted into Delta Hotels & Resorts, a Canadian brand that Marriott acquired for $134 million in April.

Analysts were cautiously optimistic about the deal, saying they hope the new company takes action to improve revenue from its Sheraton hotels.

“The combination of Marriott and Starwood creates the world’s largest hotel system with a broad range of well-recognized brand names,” said Maggie Taylor, senior vice president at Moody’s Investor Services. “However, Sheraton will represent Marriott’s second-largest brand name and it is unclear whether the strategies put in place to address Sheraton’s weak [revenue per available room] performance will be successful.”

The two companies said they expect the deal to close by mid-2016. The transaction is subject to approval by shareholders and regulators and to the spinoff of the time-share business.

Sorenson will remain president and CEO of Marriott International, which will maintain its Bethesda headquarters. Three Starwood directors would join the Marriott board, increasing the size to 14.