15 takeaways from the Marriott/Starwood filing
21 JANUARY 2016 8:18 AM
There are many interesting facts about Marriott International’s proposed acquisition of Starwood Hotels & Resorts Worldwide sprinkled throughout a 295-page regulatory filing. Our editorial director found the 15 juiciest ones.
Being a voracious reader of action novels by authors such as Clive Cussler, Lee Child and Harlan Coben, I shouldn’t have found a 295-page PDF file of Marriott International’s Form S-4 December 2015 filing with the Securities Exchange Commission all that intimidating. But it scared the S-4 out of me.
Fortunately, once I got over my fear of legalese mumbo jumbo and lots of numbers, I found it to be an interesting and educational read. When I put that document on the shelf after carefully sifting through it, it dawned on me why one of Marriott’s risks mentioned in the document is the amount of time its executives will spend on the complex deal that will presumably end with Marriott acquiring Starwood Hotels & Resorts Worldwide. There are so many details needed to address to close the $12.2-billion deal that was finalized 15 November 2015 and publicly announced a day later.
What follows are interesting nuggets that I didn’t know before reading the document. I steered away from the widely reported item that Starwood’s search committee turned down a higher offer from another company to go with Marriott basically because of the strength of its current portfolio.
1. The most fascinating part of the document was the timeline
The courting process for Starwood’s sale began on 15 April 2015, when Starwood Chairman Bruce W. Duncan met with the chairman and CEO of a U.S. lodging company referred to as “Company A” in the S-4 filing. However, it wasn’t until 20 April 2015 that Starwood’s board of directors decided to create a Strategy Committee to manage and oversee Starwood’s strategic review. That committee consisted of three members of the board: Duncan, Clayton C. Daley, Jr., and Eric Hippeau.
My take: The directors were chosen for their extensive experience in corporate finance and strategic development, as well as their knowledge of Starwood and its industry. Judging by the outcome, the board made wise choices in selecting the trio.
2. At least 11 companies expressed serious interest in Starwood
Some reports, including one from Skift, indicate that more than 30 companies reached out or were contacted during the process. But it came down to 11 that were mentioned in the S-4 filing—Marriott and 10 others identified by alphabet letters A through J. Another company, identified as Company K, was approached about a deal with Starwood, but that discussion ended quickly, the filing said.
My take: It’s safe to say most of the companies that have existing influential portfolios kicked the tires on Starwood’s offerings.
3. Starwood received several serious offers
By my count, there were “serious” offers—offers that laid out financial terms—made by various companies on 22 July, 24 August, 31 August, 11 September, 24 September, 15 October, 17 October, 18 October, 23 October, 3 November, 9 November and 14 November.
My take: One of the serious offers had to be scratched when the foreign company making the offer told Starwood officials it would have to make its offer public if it went any further because of laws in its home country. It sounds like that’s when InterContinental Hotels Group dropped out of the race.
4. A different buyer emerged in the home stretch
“Company E” made several last-ditch efforts to make the deal—on 15 October, 17 October and 14 November, but was spurned in favor of Marriott’s offer.
My take: One of the biggest non-secrets in the hotel industry is Hyatt Hotels Corporation’s interest in acquiring Starwood and the likelihood that it indeed was “Company E.” My sources tell me Hyatt was left standing at the altar waiting for its proposal to be signed.
5. Marriott was once out of the race
Marriott actually dropped out of the bidding twice before re-entering at the 11th hour. It was Starwood interim CEO Adam Aron crossing paths with Marriott President and CEO Arne Sorenson at an industry event in October that kick-started the conversation again and led to the final deal.
My take: All indications point to the Urban Land Institute’s fall meeting in San Francisco as the site of the Sorenson-Aron Summit. It sounds like networking to the nth degree was definitely in play.
6. What propelled the deal to close
The S-4 filing made specific mention to a 27 October 2015, The Wall Street Journal article that reported rumors of acquisition interest in Starwood by several foreign acquirers, which caused Starwood’s stock price to rise 9.1%, its largest single-day gain since 2009.
My take: That activity led to an urgency to get the deal done. The prices of hotel stocks bounced around all year—the Baird/STR Hotel Stock Index ended the year down 20%—and executives wanted to make sure not to miss the price spike. Never underestimate the power of the press.
7. 157,224,590 is the magic number
That’s the maximum number of shares of Marriott Class A common stock estimated to be issuable upon the completion of the deal. In addition to the 0.92 shares of Marriott stock each Starwood stockholder will receive, Starwood stockholders will receive $2 per share as part of the deal.
My take: Sorenson and Marriott’s board of directors have never been shy about buying back stock to put the company in a strong financial position—that’s the underlying reason the deal with Starwood was struck.
8. Global approval needed
It’s not just the antitrust division of the Federal Trade Commission in the U.S. that needs to approve the deal. The two companies conduct business around the world, and approval also is needed from the European Commission and the Ministry of Commerce of the People’s Republic of China, as well governments in Canada, Colombia, India, Mexico, South Africa and Turkey, among other countries.
My take: The biggest hurdle will come from the European Union, where Starwood has a large presence. I can’t see how any government can nix the deal, though, as they’ve approved so many airline mergers that have a larger impact on consumers than this deal would have on them. The combined company would represent approximately 10% of the total hotel supply in the world—a hefty amount to be sure, but certainly not a monopoly.
9. Discontent must be avoided
The deal’s closure is contingent upon the absence of any judgment, order, law or other legal restraint by a court or other governmental entity of competent jurisdiction. As of the S-4 filing, Starwood’s board had received two demand letters from purported stockholders alleging that Starwood’s board breached its fiduciary duties in connection with its approval of the deal. In addition, there were seven lawsuits filed in the Circuit Court for Baltimore City, Maryland, on behalf of purported stockholders of Starwood challenging the deal.
Starwood and Marriott believe that each of these seven lawsuits is without merit and intend to defend them vigorously, according to the filing. They also expect that similar lawsuits will be filed, and that similar demand letters might be received by Starwood, Marriott and their respective boards of directors, in the future.
My take: This might be the most difficult task of all for executives to contend with, but I suppose that will depend on health of the global stock markets. If their performances are as bad as they have been so far in 2016, stockholders might start filing letters of commendation to the two sides for executing the deal before the market nosedived.
10. There’s still an out
Starwood and Marriott may mutually agree to terminate the merger agreement before completing the deal, even after obtaining stockholder approval. The deal’s kill date is open until 31 December 2016. Of course, there’s the matter of a $400-million termination fee if either side decides to nix the deal.
My take: The chances of this happening are about as likely as no new brands being launched in the hotel space in 2016. Pretty slim.
11. No timeshare wanted
The sale of Starwood’s vacation ownership business, Vistana, is a condition required to close the deal. If the pending deal to sell Vistana to Interval Leisure Group falls through, so does the mega marriage between Marriott and Starwood.
My take: Marriott got out of the vacation ownership business in 2011 and clearly wants no part of it through this transaction. It’s a tough business that can bog down a hotel company’s performance.
12. Where Holdco comes into play
When all is said and done, Marriott will actually acquire a company called Holdco. Through a series of mergers and sub-mergers, Starwood will be converted from a Maryland corporation to a Maryland limited liability company and will be a wholly owned subsidiary of Holdco, which will then merge into Marriott and cease to exist.
My take: It sounds so simple, but it really isn’t. There were diagrams in the S-4 form explaining this structure—which helped make it slightly more digestible.
13. Some serious forecasts
The S-4 filing outlined financial forecasts prepared by Starwood’s management that project Starwood earning $1.3 billion in revenue from owned, leased and consolidated hotels—along with $800 million in unlevered free cash flow—in 2020.
My take: While it’s true that the Sheraton brand comprises more than 40% of the rooms in Starwood’s portfolio, it’s the lifestyle brands such as W and Aloft that would drive this kind of performance. I’m still not convinced Marriott will retain the Sheraton brand once the deal is concluded. The S-4 filing specifically pointed to “combining Starwood’s well-known and respected lifestyle brands and international footprint with Marriott’s strong presence in the luxury and limited-service tiers, as well as Marriott’s convention and resort segment, will create a more comprehensive and desirable portfolio for guests, meeting planners and hotel developers.”
14. Mid-year is right
The date 30 June 2016 appears to be one to keep in mind as the golden parachutes of four Starwood executives are calculated based on that date, assuming each named executive officer’s employment is terminated without “cause” or that each named executive officer resigns for “good reason” (either, a “qualifying termination”) immediately following the completion of the deal. Those in line to make millions under such circumstances include: Thomas B. Mangas, the executive VP and CFO during the negotiating process who was named Starwood’s CEO on 31 December 2015; Sergio D. Rivera, president of the Americas; Simon M. Turner, president of global development; and Martha C. Poulter, executive VP and chief information officer.
My take: The execs have worked hard to put themselves in this position, so good for them. Turner, in particular, has been a high-profile, tireless force in Starwood’s growth around the world.
15. Culture is a big thing
Among the risks listed for Marriott, one stands out as a whopper: The difficulties of combining the businesses and workforces of Starwood and Marriott based on, among other things, differences in the cultures of the two companies, union and collective bargaining agreements, and other factors.
My take: Just ask employees of Hilton Hotels and Promus Hotel Corporation how long it took to meld those two companies after a merger was announced on the last day of 1990. Some will tell you it’s still not completely resolved.
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