Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

After months of reportedly being in talks with just about every major hotel operator from the U.S. to China, Starwood Hotels has clinched a decent deal.

Marriott International, which already has the industry's highest room count, has agreed to buy Stamford, Connecticut-based Starwood for about $12 billion, 98 percent of which is being paid in Marriott stock.

While stock deals are generally less attractive for shareholders than getting the chance to cash out, most hoteliers -- including Marriott -- have delivered better returns than Starwood. Its set of brands, including W, Westin and Sheraton, are well-known yet relatively limited when compared with competitors' portfolios. That, combined with a lack of revenue growth (its sales are projected to climb less than 2 percent next year, versus an estimated 8 percent gain for Marriott), has put Starwood at a disadvantage.

Falling Behind
Starwood's pipeline of 113,000 new hotel rooms is the smallest among global operators, according to Bloomberg Intelligence.
Source: Bloomberg

Starwood shareholders will also reap an estimated $1.3 billion from the spinoff of Starwood's timeshare business and that unit's subsequent merger with Interval Leisure Group. Marriott and Starwood's joint statement Monday morning said that the stock, cash and timeshare components add up to a price of about $79.88 per share. It's not quite the $100-plus analysts from firms including Nomura had estimated.

It's also only about 6.5 percent higher than Starwood's closing level last week and lower than where the shares traded before the company announced it was exploring strategic options back in April. But while the price may sound low, Starwood investors will get to own 37 percent of a stronger stock. Marriott shares were already forecast to rise 15 percent over the next 12 months. 

In October, CNBC reported that Hyatt Hotels, which is roughly half the size of Starwood in terms of market value, was in advanced talks to buy its larger rival. In the end, Starwood got a better deal: Hyatt is worth 21 percent less than Marriott, based on its enterprise value relative to next year's estimated Ebitda. 

Chinese suitors were also said to be in the mix. And while they tend to be deep-pocketed, any deal probably would have led to a lengthy regulatory review, delaying the chance for shareholders to realize the full value of a bid. 

With Marriott, Starwood gets to join one of the most diverse -- and therefore, one of the best-positioned -- hotel companies in the world, while investors get a slice of a more highly valued stock and with low risk to the deal closing. 

Hotels Booking Mergers
After years of being dormant, industry deal activity is returning. Marriott's Starwood purchase would be the fourth-largest lodging acquisition ever.
Source: Bloomberg

The transaction, which is the lodging industry's biggest since Blackstone's Hilton buyout in 2007, could also lift the valuations of other hotel chains and beget more takeovers. Lodging M&A is already having its biggest post-financial crisis comeback, with $35 billion of transactions this year. Marriott might have just lit a fire under other players. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net