Starwood Accepts Counter Offer – Marriott Takeover Looks Unlikely

Back on Monday I posted about an “unsolicited acquisitions proposal” that Starwood had received for all the outstanding shares of Starwood stock from a consortium of companies. Up to that point the preferred offer that Starwood had received was from Marriott and, with 17 March being the deadline for counter-offers, Marriott had looked to be in a very strong position. Not any more.

The original unsolicited offer from the consortium attempting to trump Marriott’s takeover was for $76 per Starwood share, to be paid wholly in cash, for the outstanding shares of common stock in the hotel chain.

Compared to Marriott’s offer of 0.92 Marriott shares and $2.00 in cash for each share held in Starwood (equal to around $65.33/share) the consortium’s offer looked a lot better. An all-cash deal that also offered a much greater return to shareholders was always going to be very hard to turn down.

But then things got better for Starwood shareholders.

New Offer For Starwood Shareholders

Starwood has today announced that it is now in receipt of an improved offer from the consortium of $78/share…and that looks to be a near-fatal (if not fatal) blow to Marriott’s takeover hopes.

Per Starwood (bolding is mine):

[Starwood] today announced that it has received a revised binding and fully financed proposal from a consortium consisting of Anbang Insurance Group Co., Ltd., J.C. Flowers & Co. and Primavera Capital Limited (the “Consortium”), that the Starwood Board of Directors, in consultation with its legal and financial advisors, has determined constitutes a “Superior Proposal,” as defined in Starwood’s merger agreement with Marriott International, Inc.

On March 18, 2016, Starwood notified Marriott that Starwood had received the binding proposal from the Consortium that Starwood’s Board has determined that the Consortium’s proposal constitutes a “Superior Proposal” and that Starwood’s Board intends to terminate the Marriott merger agreement and enter into a definitive agreement with the Consortium.

But it’s not all over yet…at least not quite.

What Happens Now?

Under the terms of the merger (takeover) agreement between Marriott and Starwood, Marriott has until 11:59pm ET on 28 March to make a counter-offer that effectively trumps the current offer by the consortium.

Also under the terms of the agreement with Marriott, Starwood cannot terminate the agreement until the deadline of 28 March has passed – so Marriott is still in the game…technically.

Marriott, however, has a big problem. It’s offer consists almost entirely of Marriott stock while the consortium is dangling cash in front of the Starwood shareholders.

Not only would Marriott now have to offer more than the rival consortium is willing to pay, but it would also have to beat the offer by a margin that made it tempting for Starwood’s shareholders to take Marriott stock as opposed to cash. And I simply can’t see that happening.

If you’re paid in cash you can still choose to buy Marriott stock if you like it that much so why would you accept anything else?

As things stand the Consortium’s revised offer is over 19% higher than what Marriott is offering and that in itself is a huge difference in valuation. Add to that the fact that Marriott will have to exceed that (rather than just match it) to get Starwood’s shareholders on side and you can see the size of the challenge facing Marriott.

Bottom Line

I’ve seen a few comments elsewhere describing this as a bidding war but, to have a bidding war, you need to have two parties in a position to outbid each other……and I can’t see Marriott being able to beat this offer. The Consortium struck a huge blow with its first offer and, although a rally in Marriott’s stock price reduced the difference between the two offers by a few percentage points, the new improved offer from the Consortium has just reestablished a 19%+ difference between the two sides.

Marriott now has 10 days to respond and, to add a boxing analogy to the situation, it’s on the canvas and the count has started….I’ll be amazed if it gets up.