LEISURE: Anbang Ups Ante for Starwood, Marriott Says ‘Enough’

Bottom line: Starwood’s board is likely to reject a new raised offer for the company from Anbang and keep its recommendation to accept a lower bid from Marriott, which offers more certainty of closing a deal and also better long-term prospects.

Anbang ups the ante in Starwood bidding war

The latest development in the bidding war for US hotelier Starwood (NYSE: HOT) looks both expected and unexpected, with word that Chinese suitor Anbang has upped its offer to top the most recent bid from rival Marriott (NYSE: MAR). I say the move looks expected based on my previous assessment that Anbang looked determined to buy Starwood at any price. But the new bid is also a bit unexpected because Chinese media reported last week that the nation’s insurance regulator was likely to veto such a deal, which seemed to show Anbang might drop its pursuit of the purchase that is now valued at $14 billion.

The latest developments also include a response from Marriott, which seems to be saying “enough already”. That would indicate Marriott doesn’t plan to raise its latest bid, which is about 6 percent lower than the new one from Anbang, and instead let Starwood’s board decide which offer to recommend.

There’s an interesting fundamental dilemma in this story, which is pitting short-term investors who simply want to make a quick profit versus longer-term stock buyers who want to own a good hotel company. The former group would probably like to accept Anbang’s latest offer, since they can get 6 percent more money for their shares.

But the latter would probably prefer to see Marriott win, since Starwood, owner of the Westin and Sheraton brands, would have a much better future that way. That’s because Marriott is one of the world’s best-run hotel management companies, whereas Anbang has no experience in the business and would have little to offer Starwood besides its cash.

According to the latest reports, Anbang has raised its offer for Starwood to $82.75 per share in cash, topping Marriott’s own raised cash-and-stock bid last week that was worth about $78 per share. (English article; Chinese article) Starwood had previously accepted Marriott’s latest offer and scheduled a shareholder meeting to vote on the deal for April 8. (previous post) That precluded it from talking to Anbang any further, so clearly this latest bid has come without any consultation with Starwood.

Confident of Earlier Bid

Marriott said in a statement that it was confident its last bid was the best choice for Starwood. It also used a slight scare tactic by implying that Anbang might not be able to close its deal due to regulatory obstacles. That looks like a direct reference to reports last week saying China’s insurance regulator was likely to veto such a purchase due to limits on how much the nation’s insurers can invest overseas. (previous post)

Analysts pointed out that Anbang’s latest offer already values Starwood quite a bit higher than peers Hilton (NYSE: HLT) or Hyatt (NYSE: H) in terms of price-to-earnings (PE) ratios. That matters for a company like Marriott, which is making its bid based on market fundamentals. But it matters far less for big state-run Chinese companies like Anbang, which are often much more impulsive buyers that especially like famous brands.

All that said, let’s try to guess what might be happening behind the scenes in this opaque bidding war and what will happen next. Despite the media reports of a likely veto by the Chinese regulator, Anbang appears to believe it can convince Beijing that a Starwood purchase wouldn’t violate any foreign investment limits.

At the same time, Marriott appears to be signaling it won’t raise its offer again, and believes the certainty and stronger future prospects it would offer are enough to make its own bid superior to Anbang’s 6 percent premium. Starwood’s board will probably face some shareholder resistance no matter which offer it recommends. But at the end of the day I would expect it to proceed with Marriott’s offer, which provides more certainty and would clearly most benefit Starwood shareholders who want a good long-term hotel bet.

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