While the debt-funded buyback bubble may finally be on its way out, the M&A bubble is still on its 4th wind, confirmed moments ago when Marriott International announced it would buy Sheraton-owner Starwood Hotels & Resorts Worldwide Inc in a $12.2 billion deal to create the world's largest hotel chain.
After the transaction, the combined company will own or franchise more than 5,500 hotels with 1.1 million rooms worldwide, giving Marriott greater presence in markets outside the United States. Starwood, which gets nearly two-thirds of its revenue from outside the United States, had essentially put itself up for sale in April, when it said it was considering strategic alternatives.
Both hotel chains have seen their revenues decline in recent years as a result of increasing "disruption" by the unprofitable likes of AirBNB and other startups which have little chance of making money but hope to but their competitors either out of business or to consolidate.
Today's deal proves that Air BnB may be succeeding.
However, the most interesting aspect of the deal is that instead of the traditional transaction premium, Marriott will buy Starwood in a deal where shareholders will receive 0.92 Marriott Class A shares and $2 in cash for each Starwood share, the companies said on Monday. This works out to $72.08 per share for Starwood, a discount of about 4 percent to the stock's Friday close. In other words, an aggressive take under for a company that was trading as high as $86/share, suggesting the purchase price is about 16% below the 52 week highs.
According to the press release, Starwood shareholders will also get about $7.80 per share from the spinoff of its timeshare business and subsequent merger with Interval Leisure Group Inc.
Starwood shares were down 3.3 percent at $72.50 in premarket trading on Monday, while Marriott shares were up 1.7 percent at $74.01.
According to Reuters [6], Starwood, the owner of St. Regis and Aloft hotel brands, had reached out to InterContinental Hotels Group Plc, Wyndham Worldwide Corp and sovereign wealth funds for a possible deal since July.
"This greater scale should offer a wider choice of brands to consumers, improve economics to owners and franchisees, increase unit growth," Marriott Chief Executive Arne Sorenson, who will head the combined company, said in a statement.
Marriott said it expected one-time transaction costs of $100 million-$150 million related to the deal. The company expects the acquisition to add to earnings from the second year after it closes.
Up to Friday's close, Starwood shares had fallen about 14 percent since April 29, when the company said it was exploring strategic alternatives.
Expect more unexpected "take unders" as the private tech bubble finally shifts to the public markets, where valuations are likewise revealed to be stratospheric for an environment of declining cash flows.
