Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Marriott International Inc. hitched its wagon to a Starwood. Now it's reaping the rewards. 

Taking Off
Marriott has led the rally in stocks of U.S.-based hotels, surging about 80% since the company completed its takeover of Starwood Hotels for some $14 billion last fall
Source: Bloomberg

This week marks the two-year anniversary of when Marriott announced its largest acquisition ever -- Starwood Hotels -- a deal that helped the hotel behemoth increase its number of properties globally by 40 percent to about 6,400 today and seize a larger share of the travel profit pool. It had to fend off a Chinese interloper (Anbang Insurance Group) and sweeten its bid along the way, but the transaction eventually closed in September 2016 for a grand total of about $14 billion. 

Marriott's shares have soared ever since, and some of the benefits of this added scale quickly moved from theoretical to tangible in the last two quarters. So far, if the merger were rated like a hotel, it'd receive four out of five stars. But in Gadfly parlance, we give it -- and CEO Arne Sorenson, who led the transaction -- a polite clap, which is the second-highest grade in our Hindsight 20/20 system for analyzing mergers and acquisitions. It's still early days for this deal so I hesitate to call it a slam dunk, our highest grade. But there's potential for it to move up the ranks once Marriott does more to prove the stock hasn't gotten ahead of itself and that the merger benefits are long lasting. 

Marriott has nearly reached its goal of $1.5 billion of asset sales, which to investors' delight has allowed the company to ramp up share repurchases even as the stock price hits record highs. Last week, Sorenson said that over this year and next about 10,000 rooms will be weeded out from the Sheraton chain, which was Starwood's flagship brand, though a tired one in need of a refresh. The opportunity to streamline Sheraton and take advantage of the brand's appeal in Asia is one way Marriott is using the merger to maximize profitability and shareholder returns.

Another is a partnership with Jack Ma's Alibaba Group Holding Ltd. that was made possible by Marriott's increased scale in Asia, a booming spot for travel. (International business drove the majority of Starwood's revenue.) Alibaba, a Chinese internet giant, is trying to narrow the gap between its Fliggy site and the region's leading travel-booking company, Ctrip.com International Ltd. Meanwhile, Marriott is trying to drive loyalty to its brands and relinquish less of its profits to Priceline Group Inc. and Expedia Inc., which have bought up most of the big online travel agencies in recent years, leading the hotel industry to lobby harder against them

Deal Scorecard
Marriott's valuation and profits have risen since the Starwood Hotels acquisition:
Source: Bloomberg
Note: Price/earnings ratio in the "before" column is a historical two-year average. Ebitda margin is net of reimbursed costs and figure in "before" column is average for four quarters leading up to the merger. Base management and franchise fees are for Q3 of 2016, excluding the eight-day contribution of Starwood as the deal closed during that period, and for Q3 of 2017.

Marriott's valuation has swelled recently to well in excess of historical levels, with its stock price now slightly above the average analyst forecast. As such, there is reason to temper expectations from here.

Sorenson said last week that he's still cautious on corporate travel demand and predicts corporate rates will go up by low single digits on flat volume. The company's hotel portfolio also is even more skewed now toward what are called upscale, upper-upscale and luxury chains, with just 20 percent of its project pipeline dedicated to expanding in the mid-scale segment. This lower end of the market, where its rivals Hilton Worldwide Holdings Inc. and Intercontinental Hotels Group Plc are making a push, is experiencing rising demand and can "help keep revenue steady across the business cycle," according to an August note by Bloomberg Intelligence analyst Margaret Huang. 

Marriott took a risk closing this deal just before the U.S. presidential election, and Sorenson told Bloomberg News earlier this month that he's seeing some demand shift to Canada from the U.S. -- where the majority of Marriott's rooms are still located -- because of President Donald Trump's divisive rhetoric and initiatives. Still, he says revpar -- revenue per available room -- should be up 2 percent to 3 percent globally for the year (and similarly in 2018), an increase from a prior forecast of 1 percent to 3 percent. The company's cost-cutting efforts and focus on expanding fee-generating managed and franchised hotels are also leading to wider margins.

Traveling Light
Marriott has what is called an asset-light business model, meaning a large portion of its revenue is driven by hotels that the company operates or franchises but doesn't own
Source: Bloomberg Intelligence

Stock-price gains may slow a tad for now, but this has certainly been a fun trip and it's not over yet. The advantages of buying Starwood should continue to play out, so investors might want to extend their stay. 

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

  1. For 20/20 Hindsight, Gadfly studies past deals and grades them (from positive to negative) Slam Dunk, Polite Clap, Meh, Troubled or Cringeworthy.

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