LEISURE: Marriott Trumps Anbang with Surprise Counter Bid for Starwood

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Bottom line: Anbang is almost certain to make a new counter bid for Starwood above Marriott’s latest offer, and will ultimately win the bidding war due to its determination to make an acquisition at any cost.

Marriott trumps Anbang bid for Starwood

The sudden bidding war for US hotel operator Starwood (NYSE: HOT) is rapidly intensifying, with hometown suitor Marriott (NYSE: MAR) sharply raising its original bid for the company to trump a more recent offer from Chinese insurer Anbang. The move surprised many, including myself, since the new bid represents a 10 percent raise from Marriott’s earlier offer for Starwood made late last year. I had predicted that Marriott might raise its original bid as much as 5 percent, but that it would ultimately shy away from getting into a real bidding war.

Starwood has said it will accept Marriott’s new offer and even signed a deal. But we should also point out it said just days ago it also said it would accept Anbang’s offer as well. So the major question now is whether Anbang will try to top Marriott with a new bid before an April 8 deadline. I suspect the answer to that question is “yes”, since Anbang seems determined to buy Starwood at any price.

We’ll return to the question of what to expect next at the end of this post, but first let’s review Marriott’s latest bid for Starwood, operator of the Westin and Sheraton hotel brands. Marriott had originally offered to buy Starwood last November in a cash-and-stock deal worth $72.08 per Starwood share. Now it has sharply raised the offer to $79.53 per Starwood share, based on Marriott’s Friday closing price. (English article; Chinese article) Starwood has accepted the deal and signed a formal agreement.

Anbang made its original surprise offer for Starwood earlier this month at $76 per share, and then days later raised the amount to $78 over concerns it might be rejected by Starwood’s board. Anbang was joined in its bid by US private equity firm JC Flowers & Co, and by Chinese firm Primavera Capital.

Starwood’s formal signing of a deal with Marriott means it is now prohibited from talking to Anbang. But the Chinese company could still make a higher offer, which would have to come before an April 8  meeting when Starwood shareholders are scheduled to vote on the Marriott deal.

Big Cost Savings

I’ve said from the start that this deal makes the most sense for Marriott, which is a better run rival that could improve Starwood’s performance and gain greater economies of scale through a merger. Marriott made that case in an investor conference call to discuss its latest bid, saying could gain $250 million in reduced costs within 2 years of closing the deal, up from its original estimate of $200 million.

The actual deal would bring together 2 of the world’s biggest hotel operators, creating a global titan with 5,700  properties worldwide under a wide range of brands. Anbang is a much more recent arrival to the hotel business, and just last week reports said it was in talks for a $6.5 billion deal to buy a portfolio of luxury hotels owned by Strategic Hotels & Resorts. The company first splashed into the hotel headlines 2 years ago, when it announced a deal to buy the storied Waldorf Astoria in New York for $2 billion.

The Waldorf and Strategic Hotels deals show that Anbang isn’t afraid of high prices, and earlier this week bond rating agency Fitch noted that Chinese companies in general have been pushing up prices for high-profile western properties to unsustainably high levels. (previous post) This kind of mentality is quite common for less sophisticated, cash-rich Chinese investors, who are more interested in “famous names” than business fundamentals when pursuing such big deals.

Accordingly, I fully expect Anbang to make a counter offer, most likely topping Marriott’s latest bid by 10 percent or more. At the end of the day, Anbang has too much cash and clearly wants to buy Starwood at any cost, even though such a move would probably ultimately be disastrous for both companies.

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