Why Did Marriott Really Buy Starwood?

• Shares of Marriott International Inc MAR have appreciated 5.62 percent over the past three months, while those of Starwood Hotels & Resorts Worldwide Inc HOT are up 9.31 percent during the same period.
• Chad Beynon of Macquarie Research has maintained a Neutral rating with a price target of $83 on Marriott International, and an Outperform rating, with a price target of $90 on Starwood Hotels.
• The S-4 for the acquisition of Starwood Hotels by Marriott International was filed on December 22, according to which the latter will buy the former for $80 per share or $12.2 billion.

Analyst Chad Beynon mentioned that Starwood Hotels’ shareholders will receive 0.92 shares of Marriot International, along with $2 of cash and $7-8 for Vistana.

The S-4 filing revealed that Starwood Hotels had received a better price from Company E, but that it stuck with Marriott International due to the latter’s “strong mgmt team, lower execution risk, greater resulting company scale and diversification, synergies, and asset light portfolio,” according to the Macquarie report.

In addition, Starwood Hotels had also received a bid of $79 from Company D, however, given the need to announce the process, Starwood Hotels believed that it could jeopardize the negotiations with Company E and Marriott International. Therefore, the discussions were ended.

There also seems to have been an all-cash bid of $86 from Company F and $82.50-86.00 all-cash bid from Company G. However, “neither company would provide specific financing plans, so offers were withdrawn,” Beynon said.

The S-4 confirms that Starwood Hotels had received higher offers, while the recent stock reactions and all cash offers at $86 (ex-Vistana) suggests that some shareholders might be dissatisfied.

“That said, we still believe a higher offer is rare. With respect to internal estimates, we believe ’15/16 as well as ’17-20 strength highlights a positive lodging backdrop,” Beynon added.