Skift Take

In a drama where the unexpected was always expected, this latest development certainly delivered. Let's see what happens next.

Deanna Ting, Skift

Anbang Insurance Group’s consortium is dropping its bid to purchase Starwood Hotels and Resorts, leaving the door open for Starwood’s deal with Marriott to go through.

The consortium issued a release, saying: “We were attracted to the opportunity presented by Starwood because of its high-quality, leading global hotel brands, which met many of our acquisition criteria, including the ability to generate consistent, long-term returns over time. However, due to various market considerations, the Consortium has determined not to proceed further. We thank the Starwood Board, management team and its advisors for their efforts and support throughout this process.”

Both Starwood and Marriott are holding a joint investor meeting and webcast on the morning of April 1 to discuss their combination.

Why Would Anbang Walk Away?

Many signs seemed to point toward Starwood eventually choosing Anbang over Marriott. The biggest sign? Cold, hard cash — nearly $13.8 billion worth. On Monday, March 28, Starwood issued a press statement saying it was currently engaged in conversations with Anbang about a new, unsolicited, and non-binding $13.8 billion offer that would likely lead to a “superior proposal.”

There were however, some very significant challenges that Beijing-based Anbang and its consortium faced in acquiring Starwood Hotels. The biggest included gaining regulatory clearance in China and the U.S., not to mention what, if any, post-acquisition strategy Anbang would have for Starwood.

The fact that Anbang is based in China would possibly pose legal challenges if Anbang failed to honor its financing requirements. In an article for the New York Times, Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, pondered whether Starwood could effectively sue Anbang if it were unable to hold up its end of the deal.

At its root, perhaps the biggest problem Anbang had in its long pursuit of Starwood was one thing: transparency. Although Anbang chairman Wu Xiaohui made a number of overtures to Starwood since last May—six to be exact—the problem with many of his offers was simply that he didn’t have the financials, or details, to back them up.

In fact, during a Nov. 3 meeting with Starwood’s interim CEO Adam Aron, now CEO Thomas B. Mangas, and Starwood’s financial advisors, Wu had to end his meeting abruptly because Anbang still hadn’t provided specific financing details to Starwood about his offer worth $13.8 to $14.3 billion.

Most recently, when Starwood accepted a new $13.2 billion offer from Anbang and its consortium on March 18, it appeared Anbang had done its due diligence and provided a fully financed and binding proposal, with debt financing from China Construction Bank, a state-owned entity.

We can’t be exactly sure why Anbang has decided to walk away from acquiring Starwood this time around, especially after expressing so much interest in it for so long, but if Anbang’s history with Starwood has shown, financing may have had something to do with it.

Regardless of its failed attempt to purchase Starwood, it appears Anbang will proceed with its acquisition of Strategic Hotels & Resorts from Blackstone for approximately $6.5 billion. That deal includes a total of 16 hotel properties located throughout the U.S.

What Happens Now?

Now that Anbang is no longer in the picture, Marriott and Starwood can proceed with their revised merger proposal agreement from March 23. According to the terms of their new agreement, Starwood shareholders will now receive 0.8 shares of Marriott common stock and $21 per share of Starwood common stock.

The value of this offer, however, is tied very closely to the value of Marriott’s stock. News of Anbang’s departure has plummeted the stock prices for both companies. Marriott’s stock was down 4.89 percent at $67.80 and Starwood’s stock has dropped by 4.24 percent to $79.89 as of 5 p.m. Eastern.

According to a release issued by Starwood at 6:40 p.m. on March 31, the Marriott deal is now valued at approximately $13.3 billion ($77.94 per share), and is made up of $9.7 billion of Marriott stock, based on the closing price of $71.18 on March 31, and $3.6 billion of cash, based on approximately 170 million outstanding Starwood shares. After completion of the merger, Starwood’s shareholders will own approximately 34 percent of the combined company.

Bruce Duncan, Chairman of Starwood’s Board, said, “Throughout this process, we have been focused on maximizing stockholder value now and in the future. Our Board is confident this transaction offers superior value for Starwood’s stockholders, can close quickly, and provides value-creation potential that will enable both sets of stockholders to benefit from future financial performance. We continue to be very excited about the combination of our two companies and are committed to completing this deal in an expeditious manner. We are confident Starwood stockholders will support a merger that will create the world’s best and biggest hotel company and which offers significant long-term upside for not only our stockholders, but also our company and associates.”

CEO Thomas B. Mangas said, “We are excited to be part of the world’s largest hotel company with an unparalleled platform for global growth. The existing merger agreement provides substantial value to our stockholders through significant upfront cash consideration and long-term upside potential from projected shared synergies, including $250 million in cost synergies and significant revenue synergies, as well as ownership in one of the world’s most respected companies.”

Starwood and Marriott are both scheduled to hold their shareholder meetings as planned on April 8 to approve the revised merger proposal that both companies agreed to on March 23. The deal, which has already received regulatory clearance in the U.S. and Canada, is expected to close by June.

What This Means for Starwood

Even with Anbang’s departure, there’s still a chance that Starwood could receive another last-minute, unsolicited takeover bid until April 8 but at this point, that seems highly unlikely. Instead, what’s likely to occur is that Starwood’s shareholders will cast their votes on April 8 and by June, Marriott and Starwood will be a single company.

Anbang’s 11th-hour appearance, although very unexpected and very last-minute, did benefit Starwood in some ways, however. For one thing, Starwood’s top executives’ golden parachutes got a lot more golden, thanks in large part to Anbang forcing Marriott’s hand to offer a new, more costly merger proposal.

The consortium’s foray into the Starwood-Marriott tug-of-war also gave a glimmer of hope to Starwood employees who may have hoped that an acquisition by Anbang would deliver job security. It also gave hope to Starwood Preferred Guest loyalty program members, weary of losing their SPG points or seeing their beloved program rolled into that of Marriott Rewards.

As Marriott CEO Arne Sorenson noted back in December, job cuts will be coming to Starwood as part of the estimated $250 million in synergies or cost savings attached to their new deal, and while both Marriott Rewards and SPG will run in parallel to each other initially, they will eventually become one, he noted in an investors call on March 23.

What Anbang’s entry ultimately did for Starwood was to suggest that the company was worth much more than Marriott had offered for it. Its multiple takeover bids, which ranged from $13 billion to $14.65 billion over the course of nearly a year, were high — much higher — than what Marriott originally offered to Starwood’s shareholders, which was $12.2 billion, or 0.92 shares of Marriott stock and just $2 per share of Starwood.

What This Means for Marriott

If you’re Marriott CEO Arne Sorenson, you’re probably breathing a huge sigh of relief at this point, now that all those months of planning post-merger strategies for forming the world’s largest hotel company are, presumably, not going to waste.

In a statement, Sorenson said: “We are focused on maximizing shareholder value and from the beginning of this process we have been steadfast in our belief that a combination with Starwood will offer the highest value to all shareholders. Together, we can provide opportunities for significant equity upside and great long-term value driven by a larger global footprint, wider choice of brands for consumers, substantial synergies, and improved economics to owners and franchisees leading to accelerated global growth and continued strong returns. Our integration teams have been diligent in their work over the last few weeks and are more committed than ever to a timely and smooth transition.”

After news broke on March 28 that Starwood was considering a new $13.8 billion proposal from Anbang, most analysts believed Marriott was out of contention for acquiring Starwood.

“I think Marriott has reached the point where the price is just no longer attractive,” David Loeb, managing director and senior real estate research analyst for Baird Equity Research, said on March 28 regarding a possible counterbid from Marriott. “The latest offer they made was right at the point where it still made sense, but they couldn’t push it much further.”

Wes Golladay, a research analyst with RBC Capital Markets, also thought it would be unlikely Marriott could top Anbang’s latest bid. “They [Marriott] could try, but I don’t think they should,” he said. “I think it’s very difficult to make the numbers work. I would even say it’s a low chance that they would even counter, and with a meaningful counter, I’d say there’s an even lower chance [of that happening].”

Now that Marriott doesn’t have to deliver a new counterbid, it can focus on proceeding with the merger agreement as planned, although it’s probably wishing Anbang hadn’t intervened and forced them to increase the terms of their original offer. Instead of offering Starwood an estimated $12.2 billion as planned in November 2015, Marriott is now committed to offering Starwood an approximate $13.3 billion, although that number will change depending on how Marriott’s stock price holds up. Additionally, Marriott may be regretting increasing the cash component of their new Starwood offer now that the hospitality sector is seeing slower revenue growth and an increase in supply.

Another challenge Marriott faces, following a completed merger with Starwood, is what to do with Starwood’s estimated $2.3 billion worth of real estate. As Stephen Boyd, Fitch Ratings senior director, pointed out in a statement, volatile capital markets could make it challenging for Marriott to sell those properties.

Still, Marriott’s new deal with Starwood hasn’t officially closed, so until then, we’ll have to see what develops.

Chronology of Marriott-Starwood-Anbang:

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Deanna Ting, Skift

March 31st, 2016 at 4:34 PM EDT

Tags: anbang, marriott, marwood, starwood

Photo credit: The Sheraton Waikiki. Starwood Hotels & Resorts

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