Is The Fight For Starwood About Hotels Or Real Estate? It Depends On Who You Ask (2024)

The two bidders battling over Starwood Hotels , operator of upscale hotel brands including Westin, Sheraton, W Hotels and Le Meridien, have very different visions of their proposed marriages to the hotel chain.

Marriott International sees a classic corporate merger, creating the largest hotel operator in the world and wringing out hundreds of millions of dollars in cost savings. It is mostly offering stock, giving current Starwood investors the ability to roll their shares into a consolidationwith a clearly defined strategy.

The other bidder, a consortium of Chinese conglomerate Anbang Insurance and financiers J.C. Flowers and Primavera Capital, sees undervalued global real estate assets alongside premier hotel brands with stable growth prospects. It is offering up a premium-priced cash bid (funded, in part, with committed debt), and expects to keep Starwood's management and rewards program largely intact.

These differing views on Starwood will come to a head in the next few weeks as bidding on the hotel giant is finalized.

Does Marriott see enough value in a synergy-rich corporate consolidation to surpass Anbang's $78 a share cash offer, which values Starwood at over $13 billion? Or, with its long view on value, is unheralded Anbang poised to outbid one of America's storied corporations?

Don't count Anbang out despite Marriott's corporate might and influence. After all, it may have a better reason to pay a premium price for Starwood.

Anbang is one of the hungriest buyers of hotels and real estate in North America. Tucked inside Starwood are dozens of hotel properties that may make this deal its biggest ever real estate score.

Starwood owns and leases 32 hotels around the world, including the St. Regis in New York, San Francisco and Osaka, the W in Times Square, London, and Barcelona, and properties in Paris, Buenos Aires, Toronto, Rio de Janeiro, Milan and Chicago.This year, these owned hotels are expected to generate about $250 million inEBITDAaccording to R.W. Baird analyst David Loeb, putting their value at around $4 billion.

In total, Starwood operates or franchises roughly 1,300 hotels,generating$5.7 billion in annual revenue, over$1 billion in EBITDA, and free cash flow exceeding $550 million. It, like other hotel chains including Hilton Worldwide, is a prime asset for a private equity buyer. Capital light franchised hotels have proven a winning model for PE firms, and long-term capital often helps maximize the value of real estate.

Hilton may be a precedent for what the Anbang group sees in Starwood.

Presently, Hilton is in the process of spinning its trove of real estate assets from its hotel operating business. The company, like Starwood, is also spinning its timeshare and vacation rental business.

Anbang bought the Waldorf-Astoria Hotel from Hilton in late 2014. Months after buying the Waldorf, it unveiled a plan to convert the storied hotel into condominiums.It is also in the process of acquiring a $6.5 billion portfolio of hotels from Blackstone Group, the PE firm that controls Hilton. As a Chinese insurer seeking investments abroad, North American real estate may be a perfect fit for Anbang,particularly as foreigninvestors snap up property in large urban centers

“Anbangsees a great deal value in the real estate even if itdoes not initially carry a high internal rate of return,” says R.W. Baird's Loeb. "They valuethe real estate differently than Marriott,"

Wu Xiaohui, grandson in law of Deng Xiaoping, heads Anbang and is a decisive and opportunistic investor. His consortium includes J.C. Flowers and Fred Hu, two experts of Asia investment. Their joint bid for Starwood already has committed financing, even though it took the market by surprise.

When it comes to Marriott, it seems real estate is a secondary focus.In its mid-November bid, the company forecast Starwood would continue divesting its owned hotels, generating up to $2 billion in proceeds that could be used for a "capital recycling program."The bigger piece of the consolidation effort was the $200 million in annual cost savings Marriott forecast, and increasing scale.

"The combined company will be able to realize increased efficiency by leveragingeconomies of scale in areas such as reservations, procurement and shared services," Marriott said in November."We expect that these enhanced efficiencies and revenue opportunities should drive improved property-level profitability as well as greater owner and franchisee preference for the combined company's brands," it added.

Upside for Marriott may come in gaining access to Starwood's loyalty customers and expanding itsbrand. In addition, Marriottand Starwood carry modest balance sheet leverage, potentially allowing for a larger cash component to the proposed merger. But Marriott also has the opportunity to exit with a $400 million breakup fee, thuswalking away a winner no matter what.

Although Anbang raised eyebrows when it made a late entry into Starwood's sale process, some large investors support itscompeting notion of value.

“We are happy to see an increased offer from Anbang which better reflects the value of Starwood,” John Paulson, president of Paulson & Co, Starwood’s biggest shareholder, told FORBES by email.

“Anbang is a proven, sophisticated buyer of related assets and we welcome their interest in Starwood,” he added. Paulson & Co. owns nearly 7% of Starwood’s outstanding shares, according to FactSet.

Starwood shares closed 5.49% higher on Friday, while Marriott shares rose nearly 2%. Spokespeople for Starwood, Marriott and Anbang declined to comment.

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