Investors shift as Starwood’s review rolls on
19 AUGUST 2015 8:49 AM
Starwood Hotels’ shifting shareholder profile could add pressure to executives as the company nears the fourth month of its exploration of strategic and financial alternatives.
REPORT FROM THE U.S.—Nearly four months have passed since executives at Starwood Hotels & Resorts Worldwide announced their exploration of strategic and financial alternatives. And some investors are getting antsy.
Most notable is Senator Investment Group, the multibillion-dollar hedge fund that was a vocal advocate of Starwood’s strategic review earlier this year. The company reportedly has exited its 1.3% ownership position, according to analysts.
“It’s been fairly long, and a lot of investors are at least privately antsy,” said David Loeb, senior research analyst at Robert W. Baird & Company, of the process.
The expectation for such strategic and financial reviews is anywhere between three and six months, he said.
“This is getting a little long, but it’s not unusually long,” Loeb added.
Wes Golladay, equity research analyst for RBC Capital Markets, granted a bit more leeway.
“I don’t think there’s a set time period. It could be short, it could be long. We’re seeing the longer variety. … This is a global company, so there’s a lot to go over,” he said.
Putting more pressure on the process is the presence of Paulson & Company (which took a 7% stake during the second quarter, making it Starwood’s largest shareholder) and Och-Ziff Capital Management, which added another 1% stake and now controls 6%).
The two are what Loeb called “event-driven funds,” which by their very presence could add pressure to Starwood’s executive team to speed up the process.
“An event-driven fund invests in things where they think there’s some kind of event that may happen to create a value realization,” he said. “They’re often looking for potential events and trying to figure out if an event (such as a merger or acquisition) is on the horizon. Certainly if one is announced, they do their homework to see if there is a probability weighted value based on the probability of certain outcomes that exceeds the current stock price.”
Asked whether executives at Starwood are really feeling any additional heat, Loeb said, “I suspect Starwood will do what Starwood needs to do.”
Golladay had a similar reaction. “I’m sure they’re confident in what they’re doing.”
“But,” he added, “at the end of the day … it will probably speed things along. The board initially reacted due to the feedback from shareholders. They are cognizant to what the shareholders want. If they want it faster, they will definitely listen. At the end of (the day) they’re going to do what’s right.”
Starwood declined to comment. Hedge funds Paulson & Company and Och-Ziff did not return calls by press time.
Strategic review on share value
Starwood shares (NYSE: HOT) closed Tuesday at $76.86. That’s below Baird’s target value of $84.
“We think the company is worth more than it is today,” Loeb said, adding he’s still trying to determine how any number of outcomes to the strategic review could push that price even higher.
Starwood’s stock price has decreased 4.9% since executives announced the strategic review on 29 April. Far from being a knock on that process, movement in share value represents investor confidence—if not a hedge on the value inherent in the possibility of a sale, Golladay said.
That point becomes clearer when viewed within the context of broader hotel stocks, which generally have declined during the past few months.
“Their stock price has fallen,” Loeb said of Starwood. “So have their peers’.”
The Baird/STR Hotel Stock Index, a market-cap weighted index comprised of 20 of the largest market capitalization hotel companies, is down 11.1% since 29 April.
“You still have a potential sale of the company embedded in the stock price. You have held up better,” Golladay said of Starwood.
While RBC sees the strategic review as a “going concern,” its analyst sees an upside scenario: “There’s a little bit of expected value you would assign to the sale of the company,” Golladay said.
Weeding out potential suitors
While executives will take the time needed to conduct a thorough strategic review, each passing day could mean another potential M&A suitor backing out of the process.
And as the likelihood of M&A activity continues to fade, so does that inherent value baked into the current stock price, Golladay said.
“We’re already seeing some players back away,” he added.
InterContinental Hotels Group, long rumored to be a leading suitor, told HNN in July that it was not in talks with executives at Starwood.
Executives at Hilton Worldwide Holdings and Marriott International have downplayed their interest several times in the past as well.
More recently, several media outlets have reported that a pending merger between Jinjiang International Company Limited and Plateno Hotels Group was formed likely to build the clout and capital necessary to acquire Starwood.
That the strategic review would culminate in an outright sale of the company is only one possible outcome, both analysts said. Other avenues include Starwood selling off one or more brands; acquiring another company or brand to build out its brand offerings on the lower end of the chain scale; or staying status quo.
“There’s a lot of interesting possibilities,” Loeb said. “And I expect that at the end of the day those possibilities net out to a company that’s worth something a little bit more than ($76.86), and maybe a lot more.”