Susquehanna Sees Significant Value Amid Hotel M&A

• Starwood Hotels & Resorts Worldwide Inc HOT shares are down 11 percent year-to-date, while shares of Marriott International Inc MAR have declined 8 percent.
• Susquehanna’s Rachael Rothman maintained a Positive rating on both companies. The price target for Starwood has been reduced from $90 to $85, while that for Marriott has been raised from $86 to $90.
• Rothman recommended the companies based on the pro forma analysis of the announced merger and continued mid-single-digit RevPAR growth.

Analyst Rachael Rothman said that Marriott’s acquisition of Starwood would create the world’s largest hotel company with more than 5,500 hotels across over 100 countries with 30 brands. He added that the deal makes “both strategic and financial sense.”

While mentioning that the transaction offers upside for the shares of both companies, Rothman said that there is 26 percent upside in Marriot and 17 percent upside in Starwood.

“From a strategic standpoint, the merger will generate revenue synergies by making Marriott even more global, allowing the company to be in the right place, with the right product, at the right price, across the globe,” the analyst wrote.

The transaction will create scale, which would allow the entity to “better leverage G&A, negotiate with OTAs and other distribution channels, increase marketing reach, and reduce back-of-house/shared services costs for hotel owners,” Rothman commented.

The Susquehanna report noted that their pro forma analysis uses a base-case assumption of anout 4 percent RevPAR growth for both companies in 2016 and 2017. It also assumes asset sales of $1.75 billion, G&A synergies of $200 million, a 20x 2017 P/E multiple [which is in-line with the five-year average] and values Starwood’s timeshare business at $1.24 billion.