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Marriott Acquisition of Starwood – Does Biggest mean best?

The 16th November announcement that Marriott was the successful bidder of the Starwood portfolio came as a surprise to almost everyone in the industry. It was described by one industry insider as “winning the prize for best kept hospitality deal ever!” However, if the deal goes ahead- and it is still subject to competition authority and shareholder approval – will becoming the biggest Hotel brand make Marriott the No 1 player in the market? After all, biggest is not always the best as Goliath learned to his detriment. Nonetheless, this deal may see the beginning of a large consolidation of the marketplace.

In retrospect, there is much about the deal that perhaps was not that surprising. Marriott has been assertive in their acquisition strategy with the recent additions of the Protea and Delta increasing their global footprint. Acquiring Starwood will certainly aid in the growth strategy.

It is highly likely, the combined organisation will look different than the existing sum of its parts but as of now, the new Marriott would comprise 30 brands, 5500 hotels and 1.1 million rooms globally which is about 50% more than that of its nearest competitor, Hilton.   The combined company’s fee revenue for the 12 months ended 30 September 2015 would exceed US$2.7 billion. The combined company believes that the transaction would enable US$200 million in annual cost savings in its second full year after closing by leveraging back office and operational efficiencies.

There is still a lot of speculation as there often is in the early days of deals and ultimately only the Marriott Executive team know the ultimate outcome.   It would be fair to assume that a strategic view will be taken on whether every brand and every hotel is maintained in portfolio but for now the message has been little to no attrition. However, it has to be noted that the majority of the 30 brands are either upscale or luxury with many of the brands concentrated in the same prime cities and other prime locations throughout the world which may well lead to a re-organisation/shake up of the group’s brands whether by way of fusion or sale  Some analysts have also raised concerns about the number of rooms in key markets in the US, Europe and Asia and whether this may stymie the deal on the basis that it is anti-competition law.

What is known is that with over 1 million rooms in the portfolio and access to members in each of the company’s loyalty programs Starwood: 21 million; Starwood and Marriott: 54 million (membership

overlap is likely), Marriott has the opportunity to focus on its distribution strategy, increase direct business and reduce its reliance on OTA bookings.

Marriott has strong select service brands which are less established in the Starwood portfolio and allow for greater franchise opportunities, particularly in Europe where franchising is starting to accelerate as brands move away from management contracts and focus more on the franchise model currently more prevalent in the US. It was reported at the 27th European Hotel Investment Conference by Marriott’s Carlton Ervin, chief development officer, that while 60% of the existing European portfolio is under management contract, 90% of the 50 signed deals in 2015 are franchises. Traditionally, however, Marriott have been more conservative than Starwood in terms of expansion (its first hotel in London did not open until 1980) and the creation of innovative brands and it will be interesting to see how the new organisation develops bearing in mind the cultural differences between the two principals. Starwood has historically been more bullish in its footprint in international markets evidenced by the fact that more than 60% of their 183 Luxury properties are located in markets outside North America. Marriott has a greater proportion of its Top Tier segments, Luxury and Upper Upscale located in North American cities.

Starwood still owns some significant assets which Marriott may look to sell in keeping with its asset light strategy (sale of assets expected to generate $1.5B - $2B in after-tax proceeds). The real challenge for Marriot is how it will distinguish between its stable of many upscale brands and the extent to which it is doing the deal to seize the initiative from its competitors. In other words, it may look to sell on some of its brands to hotel groups that cannot compete on the same scale. What is certain is that if the deal goes ahead, Marriott will be under extreme pressure to make its combined size pay. Equally, its competitors will be under pressure to do their own game changing deal.