Bottom line: China’s anti-trust regulator is moving cautiously in approving the Marriott-Starwood merger because it involves 2 major global brands with a big presence in the high end of the market, but will ultimately approve the deal.
China is once again creating problems for an offshore M&A deal that would create the world’s largest hotel company, with word that it’s extending an anti-trust review period for the landmark merger of US hotel giants Marriott (NYSE: MAR) and Starwood (NYSE: HOT). Industry watchers got some brief entertainment earlier this year when Chinese insurer Anbang sparked a bidding war with its surprising offer for Starwood, operator of the Sheraton and Westin brands that had already agreed to be acquired by Marriott. Anbang later dropped that bid, but now more delays are coming from China, where the anti-trust regulator says it needs more time to review the deal.
This particular deal really seems to have very little anti-trust implications, since the hotel industries in both China and globally are quite competitive. But that said, the Ministry of Commerce (MOFCOM) may be paying extra attention to this particular deal because it involves 2 very well-known consumer brands. It would also mark the merger of 2 of the world’s biggest players in a sector where China someday hopes to compete globally.
According to the latest reports, Marriott is saying that MOFCOM has said it needs up to 60 more days to review the deal, which was finalized in April after Anbang suddenly dropped out of the bidding war. (English article; Chinese article) Regulators in all other major global markets have already approved the deal, leaving China as the last one that has yet to give its blessing.
The deal would create the world’s largest hotel operator, with a combined enterprise value of $36 billion and 1.1 million hotel rooms under management. That would be well ahead of the world’s second largest operator Hilton (NYSE: HLT), which has 775,000 rooms.
Within China, a Marriott-Starwood combination would become the country’s largest operator, though its actual share of the market would be quite small at just 4.1 percent. That would place it just ahead of domestic rivals Homeinns and China Lodging Group (Nasdaq: HTHT), which each have about 4 percent also. But whereas the domestic firms are squarely focused on the budget hotel end of the market, Marriott-Starwood is mostly focused on the higher end and luxury segment.
China has only been reviewing this kind of global M&A for less than a decade, and was once notoriously slow for the length of its reviews. But following foreign complaints, MOFCOM seemed to be speeding up the process. In the few cases where it has raised anti-competitive concerns, the Chinese regulator has usually given its approval of such deals if the merging companies agree to divest some of their China assets.
All of that brings us back to this particular deal and why MOFCOM might be extending its review. Just last week the regulator was in another headline when an official implied that MOFCOM’s approval was needed for the newly announced plan to merge China’s 2 leading hired car services firms, Didi Chuxing and Uber’s China operations. (previous post)
Didi and Uber took the unusual step of publicly stating their surprise at the regulator’s comments, since they believed their merger wouldn’t require such approval. MOFCOM’s stance did seem to show that it was trying to be more assertive, especially in emerging Internet industries where it has been quite passive up until now.
More broadly speaking, China does seem to have a strong interest in deals that involve famous consumer brands. Didi-Uber certainly fits that description, and China also paid close attention to another recent global marriage between 2 of the world’s top global beer brands, InBev and SABMiller.
The involvement of 2 global leaders in a big consumer sector like hotels could be a big factor behind the regulator’s caution this time, even though there’s really no anti-competitive implications. Accordingly, I do expect the regulator will ultimately approve this particular deal without any extra conditions.
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