Starwood Hotels & Resorts Worldwide Inc. may need to accommodate activist shareholders with a merger or buyout.
Starwood, which owns high-end hotel chains such as W and Westin, has one of the worst stock-return and growth outlooks in the industry. It’s also entering the second month of searching for a chief executive officer as pressure builds for the $14 billion company to buy some lower-cost hotel brands to keep up with rivals.
Activists tend to sniff around when leadership is in flux, and there’s already speculation that one is targeting Starwood. Analysts say the end result could be one of several deal scenarios, such as selling to Wyndham Worldwide Corp. or structuring a tax inversion with InterContinental Hotels Group Plc.
“Something is going to happen in the lodging sector,” Patrick Scholes, a New York-based analyst for SunTrust Robinson Humphrey Inc., said in a phone interview. “Starwood needs some help.”
Starwood shares jumped 3.9 percent on March 26 after the Federal Trade Commission gave clearance to an unspecified deal between Starwood and Senator Global Opportunity Offshore Fund Ltd., which is a unit of Senator Investment Group LP and owns a stake in the hotel chain.
While Senator doesn’t typically take activist positions itself, it seeks to profit from corporate mergers and restructurings -- the type of situations that are often prompted by activist investors. The hedge fund’s involvement in Starwood is fueling bullishness for a stock that analysts otherwise see little upside to owning over the next 12 months, forecasts compiled by Bloomberg show.
‘Bias for Action’
A representative for Senator declined to comment. A representative for Stamford, Connecticut-based Starwood didn’t respond to a phone call or e-mail seeking comment.
“For what it’s worth, I’m someone who has a bias for action,” Adam Aron, the interim chief executive officer of Starwood, said in February after the abrupt departure of Frits van Paasschen. “In taking on this challenge, even on an interim basis, I have no intention of merely being a caretaker.”
Starwood shares fell 0.7 percent to $81.89 on Friday in New York.
The company’s other brands include St. Regis, Sheraton, Le Meridien and the Luxury Collection. In a merger with Denham, England-based InterContinental, Starwood would also gain Holiday Inn, Holiday Inn Express and Crowne Plaza, rounding out its portfolio. Companies have also been structuring deals with firms abroad in an attempt to lower their tax bills.
A representative for InterContinental declined to comment.
While InterContinental’s 6.4 billion pound ($9.6 billion) market value is smaller than Starwood, the company is more expensive relative to sales and profit, which would pose a challenge for any deal.
“Starwood has a lot of concentration at the high end of the hotel segment, but that’s not where the growth is, so they need some balance,” Nikhil Bhalla, an analyst for FBR & Co., said in a phone interview. “But in this stage of the cycle, they’re going to have to pay up to acquire any brands and that may not be accretive. So I think the best route for Starwood would be a sale of the company.”
SunTrust’s Scholes said it might be a good fit for Wyndham, which at $11 billion is slightly smaller than Starwood. Wyndham lacks higher-end brands, which is a drawback because customers that are loyal to certain hotels like to have options depending on their type of travel, he said.
Wyndham Chief Financial Offer Thomas Conforti has said the company is looking for acquisitions. Small transactions are more likely, but “should a big deal come up that’s compelling and helps us achieve our objectives, we wouldn’t shy away from it,” Conforti said last month during an analyst conference. A representative for Wyndham declined to comment.
Starwood’s plan to spin off its timeshare business may also make it a cleaner target. The move is part of an industry trend in which hotel operators are cutting their real estate holdings to focus on property management and franchising. Conforti says Wyndham is “religiously a franchising model,” owning just two of the 7,500 hotels it operates.
To help facilitate a deal, Starwood could shift its remaining properties into a real estate investment trust, SunTrust’s Scholes said.
With interest rates still so low and the capacity to add debt at Starwood, a leveraged buyout is an option, FBR’s Bhalla said. And there’s precedent for LBOs in the hotel industry.
Blackstone Group LP acquired Hilton Worldwide Holdings Inc. for $26 billion in 2007 and took it public in 2013. Blackstone’s gain in the deal is now about $14.8 billion. Blackstone, which provided seed money to Senator when it opened in 2008 and bought a minority piece of the business last year, also bought out the La Quinta chain in 2005 and still owns a chunk of the company.
The other hotel operators aren’t under the gun to make an acquisition right now, so a sale to a private-equity firm may make the most sense, Bhalla said.
“It’s Starwood that needs to find a way to realize value,” he said. “For any company to go private, this is probably the best point to do it.”