Starwood's Suitors: Marriott & Anbang Pros & Cons

Editor's Note: Press reports indicate that Anbang has withdrawn its offer, and Marriott stands as the sole suitor to buy Starwood. Nonetheless, the story below, posted earlier today, offers valuable insight into the Starwood sale's progression.

The most straightforward explanation of the events ahead is that Marriott International likely will acquire Starwood Hotels & Resorts Worldwide for $13.6 billion. But the backstory of what would constitute the largest deal in hotel industry history features more twists than a tangled Slinky, and there's still a bidding war underway.

Starwood first agreed to sell to Marriott in a cash-and-stock deal worth $12.2 billion in November 2015. On March 11, less than three weeks before each company's shareholders were set to vote on the merger, a Chinese consortium led by Anbang Insurance Group Co. offered to buy Starwood for $12.8 billion in cash. Starwood accepted an even higher, $13.2 billion bid from Anbang on March 18, calling it "superior" to the Marriott deal. Marriott quickly came back with its own offer of $13.6 billion, featuring more cash this time around. Starwood took it.

At press time, Marriott shareholders and Starwood shareholders each are scheduled to vote on the revised merger in separate meetings on April 8. But the Anbang consortium, which also includes J.C. Flowers & Co. and Primavera Capital, came back on March 28 with an improved offer of $82.75 in cash per share. Starwood's board said it is "reasonably likely" to be considered a "superior proposal" to Marriott's bid.

Which Bidder Can Cross the Finish Line?

Before the news broke of an improved Anbang bid, Chinese financial publication Caixin Online posited that the China Insurance Regulatory Commission could stifle an Anbang counteroffer, as the regulator bans insurers from investing more than 15 percent of their assets abroad. The speculation was that such a policy could be an issue for Anbang, as it also agreed in March to pay The Blackstone Group $6.5 billion for Strategic Hotels & Resorts and bought the Waldorf Astoria New York for $2 billion in 2014.

Bjorn Hanson, a clinical professor at New York University's Tisch Center for Hospitality and Tourism, said contingencies that have yet to be made public could affect the terms of any Anbang agreement, such as clauses stating the deal is "subject to regulatory approval" or "subject to obtaining financing."

Explaining Marriott's $13.6 billion bid, CEO Arne Sorenson said at the time that his company's original $12.2 billion agreement was "almost too good, which is potentially what drew another bidder in here at the last possible moment." He said at the time that Marriott remains convinced of the power of the two companies' merged platform, noting, "It's not as good a deal as the deal we were about ready to vote on and close at the end of March before the new offer came in, but it's still a deal that we're very excited about pursuing."

Whether Sorenson's professed enthusiasm means another counteroffer remains unclear. "If [Anbang's March 28th bid] were just an all cash offer, then it would be hard for Marriott to make a counteroffer," Hanson said, but there may be more to it. "Not knowing what the contingencies are, we have to assume the contingencies may include some other non-economic issues, but we don't know."

Marriott does have an edge when it comes to regulatory approval, as the Starwood-Marriott deal already has the green light from the United States and Canada and evaluation is underway in the European Union and China. But whether Marriott would be able to counter Anbang's latest offer is up in the air. Hanson said it would be difficult for Marriott, as a public company, to put in a bid that beats Anbang's price, as an increased offer would decrease its earnings per share too much in the short term.

Should Starwood accept Anbang's offer, Starwood will owe Marriott $450 million as a breakup fee.

Still, Hanson said he would be surprised if Marriott just walked away. Marriott reaffirmed its commitment to the Starwood acquisition in a media release following Anbang's second offer, stating "the previously announced amended merger agreement is the best course for both companies."

"It's possible that Marriott would submit a slightly more favorable offer, maybe more cash, less stock," Hanson said, "maybe some other commitments to the board and management that make it a relatively more attractive offer based on economics."

If Anbang Buys Starwood

There are two schools of thought around how Starwood might change if it did accept an offer from a Chinese bidder, Hanson said. The first is that the company would be left alone to do what it can in existing markets but also would receive special opportunities to expand in China. The other is that Starwood would be expected to act like a Chinese company and be subject to government influence.

"My guess is it would be more likely to do the former than the latter," Hanson said. "An international company would be buying Starwood because of the strong brand and culture and its ways of doing business around the world, so there's no threat in the culture. But certainly there is uncertainty."

If Marriott Buys Starwood

A combination of Marriott and Starwood would create the world's largest lodging company, with about 5,700 hotels and 1.1 million rooms across 30 brands. In Europe, in particular, Marriott's size would double. Marriott also would absorb Starwood's 21 million Starwood Preferred Guest loyalty members and create a combined loyalty platform, which Sorenson said would take "the best of both" and open up more partnership opportunities.

Additionally, Marriott would benefit from the strides Starwood has made to grow since Starwood CEO Frits van Paasschen left in February 2015. Last year, Starwood signed 220 new properties, a 26 percent increase over 2014 and the most franchise and management agreements signed in any year in the company's history. It also unveiled two new brands, Tribute Portfolio and the Design Hotels collection and got the jump on Marriott and its competitors in Cuba by becoming the first U.S. hotelier to sign an agreement in the country since 1959.

Hanson said that at $13.6 billion price tag, $14.4 billion when adding in the value of Starwood's timeshare spin-off, Starwood is still a favorable buy for Marriott. "The amount of information, if nothing else, that Marriott will have is extensive," he said. "Marriott and Starwood brands control so much of the hotels that receive the first bookings in their markets. They would have early information about markets performing better than forecast on a specific night or worse and know how to price accordingly." If the company receives inquiries about a large convention group in a market, for instance, Marriott will be the first to know what kind of demand will follow.

The company also would have a competitive edge in understanding traveler behavior based on its vast number of bookings, as well as its combined loyalty program. "Certainly people pay billions of dollars for the technology that enables that [kind of information]," Hanson said.