UPDATE: While the Anbang-led consortium counteroffer to Starwood is higher that Marriott’s, analysts are unsure whether this new bid will come to fruition.
Updated 3:00 p.m. Eastern Daylight Time, 28 March 2016 with reactions from industry analysts
REPORT FROM THE U.S.—Starwood Hotels & Resorts Worldwide’s planned merger with Marriott International once again looks precarious, as a consortium led by Beijing-based Anbang Insurance Group has increased its all-cash offer for Starwood.
Starwood officials announced that the Anbang consortium’s latest offer—which is nonbinding at this point—for the company’s outstanding shares is valued at $82.75 per share. Starwood executives said in a news release that this latest offer is “reasonably likely to lead to a ‘superior proposal.’”
This new offer is the latest in a bidding war for Starwood between Anbang and Marriott. On 16 November, Marriott first announced its intent to acquire Starwood with a mostly stock-based deal valued at $63.74 per Starwood share, not accounting for the value of Interval Leisure Group stock from the spinoff of Starwood’s vacation ownership business.
The Anbang consortium managed to woo the Starwood board of directors with an all-cash offer of $78 per share earlier this month, but Marriott officials upped their offer to $79.53 per share and increased the cash in the deal to roughly a quarter of the total value, which was enough to reignite the planned merger. The two companies also increased Starwood’s break-up fee payable to Marriott from $400 million to $450 million.
According to Starwood’s Monday statement, the Anbang consortium returned with an offer of $81 per share on 26 March, and increased that offer to $82.75 later that day.
It remains to be seen if Anbang’s latest offer will be enough to once again win the favor of Starwood’s board, and the two sides are still working to finalize a binding offer.
“The Starwood board, in consultation with its legal and financial advisors, will carefully consider the outcome of its discussions with the consortium in order to determine the course of action that is in the best interest of Starwood and its stockholders,” company officials wrote in a news release announcing Anbang’s new offer. “There can be no assurance that discussions will result in a binding proposal from the consortium, that the Starwood board will determine that any such proposal is a ‘superior proposal’ or that a transaction with the consortium will be approved or consummated on any particular terms or at all.”
What happens next
Industry analysts said it is unlikely Marriott will return to Starwood with a substantially higher offer. Written comments from Baird Equity Research’s analysts to clients Monday stressed just that.
“We believe Marriott has limited levers to pull to increase its offer for Starwood should the consortium counter,” they wrote. “An all-cash offer from the consortium becomes increasingly attractive as Marriott’s stock falls. We believe a key risk to Marriott’s merger assumptions (particularly its accretion/dilution analysis) is its ability to secure attractively priced debt financing, and the higher leverage implied by Marriott’s revised proposal could limit management’s desire to increase the cash component of its offer.”
Baird analysts also noted that Anbang has been in the hunt from Starwood for longer than many believed. Anbang made three all-cash offers for the company during Starwood’s strategic review process in 2015 but never provided “specific financing plans” or performed detailed due diligence.
Starwood shareholders will meet briefly Monday in a meeting originally scheduled to discuss and vote on the planned merger with Marriott. Company officials said that meeting is expected to be immediately adjourned and reconvened on 8 April, and Marriott shareholders are scheduled to meet and vote on the acquisition of Starwood that same day.
Marriott officials issued a statement Monday that cast doubt on the viability of Anbang’s proposal, claiming the Marriott/Starwood deal holds “greater long-term value for Starwood shareholders.”
“Starwood stockholders should give serious consideration to the question of whether the Anbang-led consortium will be able to close the proposed transaction, with a particular focus on the certainty of the consortium's financing and the timing of any required regulatory approvals,” the statement said.
Marriott officials said they will have no further comment “until further developments occur.”
If Starwood shareholders are hoping that Marriott comes back once again with a higher offer, analysts say they’re likely to be disappointed.
“I think Marriott is done at this point,” said David Loeb, senior research analyst and managing director for Robert W. Baird & Company.
Marriott is right at its limit where the deal makes financial sense in the near future, he said, and that’s the result of the higher cash cost, the leverage to take it on and the long-term costs of that additional debt. Making a third, higher offer could hurt the company’s credit rating in the near term, and Loeb said Marriott executives are too disciplined for that.
“Besides, a $450-million consolation prize is not such a bad thing,” he said.
On the other hand, the path forward for Starwood and Anbang isn’t free of problems, and that could give shareholders pause. With the regulatory reviews by both the Chinese and U.S. governments, it’s not a sure thing the deal would go through, according to C. Patrick Scholes, managing director of lodging and leisure equity research at SunTrust Robinson Humphrey.
If the deal were to fall apart while getting regulatory approval, Scholes said, Starwood’s stock would take a hit and Marriott would be in a greater position of power, meaning it could come back with a lower offer for Starwood.
“My inclination is this latest offer is only $3 more,” he said. “I just don’t know if that’s going to be good enough.”
The real hurdle will be the Committee on Foreign Investment in the United States, Loeb said, not the Chinese government. Despite speculation that some Chinese insurance regulators may have problems with the deal, it’s generally believed the Chinese government has at some level blessed the acquisition by allowing Anbang to bid for Starwood in the first place.
The acquisition might run counter to U.S. government concerns for national security, Loeb said. Traveling government officials as well as business and technology professionals could have concerns regarding privacy and security at properties owned by the Chinese company.
Although Anbang would probably do everything it could to keep the Chinese government out of its properties, the concern would likely still exist, he said.
Wes Golladay, VP and equity research analyst at RBC Capital Markets, said Starwood shareholders should be anxious about the regulatory and financing risks associated with Anbang’s offer, but not so worried that they opt not to take it. He said the fact Starwood’s board is already leaning in this direction should give shareholders more confidence.
The board has “information we don’t have,” he said. “But it would make me a little nervous.”
After Anbang quickly increased its offer from $81 per share to $82.75 per share, Golladay said the consortium sent a clear signal that it is determined not to be outbid.
“They’re willing to be the high bidder at any price,” Golladay said.