Monday, 16 November 2015

The 'take-under' of Starwood by Marriott

Another day, another takeover this time a US$12bn odd approach by Marriott to Starwood to create a hotel/hospitality behemoth.  Actually scrub that, maybe it was a 'take-under' as noted here.

Over the years I have seen plenty of acquiring companies suffer a falling share price following the announcement of a deal for various reasons.  But a company being acquired - well that is more unusual.

As the above linked Zero Hedge piece noted:

'Marriott will buy Starwood in a deal where shareholders will receive 0.92 Marriott Class A shares and $2 in cash for each Starwood share, the companies said on Monday. This works out to $72.08 per share for Starwood, a discount of about 4 percent to the stock's Friday close. In other words, an aggressive take under for a company that was trading as high as $86/share, suggesting the purchase price is about 16% below the 52 week highs'.

A discount to the stock's Friday close.  Hmm.  Not the greatest bid level...and a slight fall in the Marriott share price today hardly helps...nevertheless a 6% fall in the shares is a pretty sad indictment of the deal...

A few observations from the deal conference call...

Starwood management – ‘we investigating a full range of possibilities…including buying other companies’ (nod to London-listed International Hotels Group approach?)

‘combining with Marriott – better equipped to derive long-term value for shareholders’.  Noting Starwood shareholders get a premium paid for their shares (rather than paying a premium to buy another company etc.)

‘we wanted stock’ – Starwood management

‘consideration much higher than US$72 a share’…Starwood shareholders will own 37% of the combined company

‘greatest longer-term return for Starwood shareholders’

I think we get the drift as to why they perceived the deal as the best they could do.  Interesting there were also some noises about the underlying market place not being super easy e.g.: 

Can feel noises re ‘less robust marketplace’

And what do Marriott get/see from this aside from an acquisition of a peer near a 52 week low?

‘wide distribution of different brands across price points is critical’

‘the future for luxury is very strong…believe have industry leading brands’

EPS accretive in second full year

‘Sheraton…truly global brand’. 

Using cash would have been cheaper but via shares allows Starwood shareholders to participate…and ‘don’t change the risk profile of the company’

The integration philosophy of ‘choose the best from each company’ sounds pragmatic and sensible (although I bet it inevitably includes more from the Marriott side than the Starwood one) and following some more detailed numbers/combination plan disclosure I will take a proper look at the combined entity.  However the overriding image on the day of the deal announcement has been the plunging Starwood share price.  

A 'take-under' indeed and the sort of concept which is apparent at the end of a bull run in an M&A market?  What was that chart again that I ran in a Financial Orbit Speaks a couple of weeks ago?


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