Deals

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

Cue the hotel elevator music for shareholders of Starwood Hotels: They're stuck waiting for the company to clear up its mixed signals before next week's merger vote.

Starwood tells them that the proposed bid from a consortium led by Chinese insurer Anbang is likely to be the superior one. But as of Monday, it hadn't yet changed its recommendation that they vote in favor of the lower, firmed-up offer from Marriott International. Which suitor will win? That's still anyone's guess because while it's hard to see Marriott being able to justify raising its offer again, it's also not clear whether a deal with Anbang will pass regulatory muster or how protracted or complex the process would be. 

Trading in Starwood shares on Monday reflected all this uncertainty. Normally a higher competing bid would cause the target company's stock to shoot up. But Starwood investors showed they aren't willing to bank on a sale to Anbang getting done, hence the large spread between its bid and the stock price:

Investor Limbo
Anbang may be offering more cash, but Starwood shareholders aren't convinced a deal will be solidified with the Chinese insurance company.
Source: Bloomberg
Both offer values include the Interval Leisure Group transaction consideration.

What had been a run-of-the-mill friendly merger struck in November between Starwood and Marriott was upended by the Chinese interloper two weeks ago -- a trend in M&A this year, as Chinese companies encounter slowing economic growth and look abroad for stable investments to park their cash. 

As for Starwood, there are pros and cons to be weighed between the two deal options. With Marriott, there are obvious synergies (the company estimates $250 million annually),  a stock component that allows Starwood holders to benefit from those cost savings and a clear path to completing the transaction. What Anbang offers is more money (and potentially the chance for Starwood management to keep their jobs). But where is the financing coming from and how secure is it? Will the government allow Anbang to scoop up Starwood after buying other U.S. hotels recently? How many locations will it need to sell to appease regulatory concerns? Those are big questions still unanswered for the shareholder base.

What's At Stake
Given that Anbang is a Chinese suitor, regulators will want to take a hard look at exactly what it would be getting in a Starwood takeover. Here's a breakdown of how Starwood generated sales last year.
Source: Company's year-end filing

Anbang's latest bid -- non-binding at this stage -- is for $82.75 a share in cash, or about $14 billion before factoring in net debt. Starwood said Monday that it's still discussing "non-price terms" with Anbang and working to finalize "definitive documentation." Marriott's cash-and-stock offer was worth about 5.5 percent less than Anbang's on Monday. 

Marriott's own shares surged in what seems to be a sign that its investors are happy it didn't raise its takeover offer again -- and it probably shouldn't, because at this point a higher offer would likely hurt next year's earnings. The $18 billion hotel operator did say in a statement following Starwood's on Monday that it's committed to the merger, though. The ball is in Anbang's court to show that its offer is viable, and then Starwood can give shareholders more direction before they vote. 

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

  1. On last week's episode of "Deal of the Week," Bloomberg's Ed Hammond and I delved into the smart approach Chinese suitors are taking as they play "homewrecker."

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