Share Watch: Starwoods - Hotel chain mergers get the five-star treatment
It is extraordinary how the image of a successful hotel chain persists. Many people still believe that the great hotel businesses are run by dedicated manager/owners who live in one of the nicer room upstairs.
The persistent image is that these passionate perfectionists are in the kitchen first thing in the morning to supervise breakfast and are still there long past closing time, ushering stragglers out of the residents' lounge.
While that may well have been the case at one time, the ownership of great hotels these days may be due to nothing more than a tax-break. That certainly was the inspiration that prompted the creation of the company we are analysing today, the Starwood Hotels chain, by a cluster of property moguls.
Perhaps its unromantic origins may help explain why Starwood, owner of the Westin, St Regis and Sheraton hotel brands, would choose this year to dump its CEO and put itself up for sale.
Starwood fell for the discrete charms of the Marriott chain, encouraged by an offer of $12.2bn.
Hotel chains are mad to consolidate just now. This is because in the past, growing a hotel group required enormous capital. Now the fashion is to be 'asset light'. The company will manage, but not own the hotels. This strategy helps roll out brands cheaply across different countries. In addition to the Marriott acquisition, Accor, the French hotel chain, is acquiring a group that owns luxury hotel brands like Fairmont, Raffles and Swissotel for $3bn. In the UK, Travel Lodge and Premier Inns are likely to be sold.
Consolidation is also helped by the fragmentation of hotels worldwide.
The top 10 hotel companies globally have only 30pc of world market share and no one hotel group has more than 5pc. In addition, most of the large hotel groups are concentrated on the US market.
Last year, only a quarter of all Marriott operations were outside the US. With the Starwood deal this increases to 35pc. However, the new combined company will still only account for 14pc of hotel rooms in the US.
The acquiring company, Marriott, had its origins as a restaurant chain and once owned the restaurant business of our childhood cowboy hero, Roy Rogers, (a guitar-playing, gun-toting, son-of-a-gun, if ever there was one). Marriott now employs 200,000, has group revenue of $12bn and a market value of $18bn.
But Starwood, the company being acquired, is no tiddler. It employs 180,000 people, has revenues of $6bn, operating profits close to $1bn and owns, manages and franchises over 1,200 properties.
The deal brings together two of the top five hotels worldwide and will give the combined business more than 5,500 hotels worldwide, an enormous one million bedrooms and 30 different brands, more than double its nearest competitor.
It will also give Marriott a strong Asian presence, complementing its programme of opening a new hotel every two weeks in China.
Starwood shareholders are reckoned to have been hoping for a higher offer. While they end up with 37pc of the new company, there is no cash payment, just a share swap. The total deal to Starwood investors is $70 in the form of Marriott shares, $8 from the sale of Starwood's time-share operations and a $2 special dividend. The acquisition also brings challenges for Marriott. It must figure out how to integrate Starwood's rival brands with its own, as it competes for the same customers.
It also faces a major challenge with the Sheraton hotels, which account for almost half of Starwood's revenue.
While the rationale given is to create as much scale as possible at all price levels, there is also concern from emerging competitors like Airbnb and online travel agencies, Expedia, Price Line and Google.
On the positive side, the deal may escape the anti-trust inspectors. The price to earnings ratio of 23 looks toppy, but for patient investors an investment at $71 today could prove worthwhile. Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned