Anbang Insurance Group is expected to make another play to buy Starwood Hotels & Resorts Worldwide, but analysts are split on whether the next offer will be enough to beat Marriott International’s latest bid.
REPORT FROM THE U.S.—Hotel industry analysts say the ball is now in Anbang Insurance Group’s court in the contest for Starwood Hotels & Resorts Worldwide, and the Chinese company must now decide whether to make another play for the Stamford, Connecticut-based company or take that ball and go home.
Analysts’ expectations skew more toward the former rather than the latter, and most say the Anbang-led consortium is likely to come back with an offer surpassing the latest from Marriott International, at least in terms of dollar value.
“We’ve probably seen Marriott’s best offer,” said Ryan Meliker, managing director and senior real estate investment trust and lodging analyst at Canaccord Genuity. “I don’t know if we’ve seen Anbang’s best offer.”
Starwood has had a rollercoaster of a week, as the company was first wooed away Friday from its planned merger with Marriott by a $78-per-share all-cash offer by the Anbang consortium. Marriott and Starwood jointly announced Monday that they signed a revised merger agreement that upped the full value of Marriott’s offer to $79.53 per share, roughly a quarter of which would come in cash as opposed to Marriott’s initial bid, which comprised mostly stock.
Sweetening the pot
The question among analysts doesn’t seem to be if Anbang will come back with a high offer, but how much higher that offer will be.
Meliker said Marriott’s offer inherently holds more value to Starwood because of the long-term synergies that come from combining the two companies, and Anbang has to adjust for that in any counteroffer. He said Anbang overcame that obstacle with its first run at Starwood.
“I think you have to discount (Anbang’s) all-cash bid,” Meliker said. “That ($78-per-share) bid is probably discounted $5 or $6, meaning it was more like a $72 or $73 bid, which was still above where Marriott was.”
David Loeb, senior hotel research analyst and managing director at Robert W. Baird & Company, said Anbang will ultimately win the day, but Marriott made a shrewd play by renegotiating its initial deal. Part of the new agreement between Marriott and Starwood is the two companies have increased Starwood’s break-up fee payable to Marriott from $400 million to $450 million. Starwood also will be liable to reimburse Marriott an additional $18 million for costs incurred through the merger process.
“They get Anbang to pay more,” Loeb said. “At least this way, Anbang doesn’t get it at a real bargain price. Secondly, they get an extra $50 million in the breakup price.”
Anbang will likely come back with another offer that is not just a dollar or two higher but substantially so, Loeb said. Starwood’s board would then accept it, he said, and Marriott then would likely choose to walk away. Cash is cash, Loeb said, and the Marriott stock offered through the deal is a new creature that would require more analysis by the board and advisers to say whether it’s a better offer.
“Anbang has been nothing but smart,” he said. “They’ll come back with an unambiguously higher offer to make it easy to say yes if you’re the Starwood board.”
Meliker had a less glowing review of Anbang’s approach, though.
“They’re just throwing money around left and right,” Meliker said, also referring to the recent deal to acquire Strategic Hotels and Resorts from Blackstone Group, which was confirmed at last week’s Hunter Hotel Investment Conference. “And these are deals they could’ve won for less last year.”
According to Meliker’s logic, Anbang must come back with an offer in the range of $85 per share. He couldn’t say how likely that offer could be.
“I’d be surprised if Anbang didn’t come back, but I don’t know where they are from a valuation perspective and where they can stretch,” he said.
As a China-based company, Anbang also faces several regulatory hurdles in its quest to acquire Starwood, analysts said.
“It’d have to be approved by (The Committee on Foreign Investment in the United States), and we’ve never seen a deal this size with a Chinese company taking on a U.S. company,” Meliker said. “You have to underwrite that risk to an extent.”
Regulatory issues aren’t only a problem in the U.S., either, with recent reports out of China that Anbang could face problems getting capital out of its home country.
Chinese financial magazine Caixin recently reported that an increased offer to Starwood would have hard time clearing Chinese insurance regulators, Reuters reports.
Impressions of the Marriott deal
Overall, analysts agreed with Marriott President and CEO Arne Sorenson’s assessment of the revised merger agreement: It isn’t as much of a deal as the one they had in place, but it’s still good overall.
“At these levels, I still think this is an attractive deal for Marriott,” Meliker said. “If you get above these levels, it’s not.”
Sorenson said in a conference call discussing the new deal Monday that the increase in cash will push up his company’s debt but also functions as “an advance share repurchase.”
Analysts, including UBS’ Robin Farley, said that explanation makes sense.
“It is the equivalent of levering up to 3.6x to buy back shares, while (Marriott) expects to get back to 3.0-3.25x levered by year end and still do some share (repurchases) in Q4,” Farley said in written comments to clients.
Analysts for Moody’s Investors Service said Marriott’s credit ratings remain stable even as they take more debt on to complete the deal because of the long-term advantages of the merged company’s size. However, there could be short-term issues, though.
"The revised offer will result in weaker initial credit metrics; however, we believe Marriott will be able to quickly bring its leverage back in line with its balance sheet target," Maggie Taylor, Moody’s SVP, said in written comments on the deal.