A battle has been brewing between Marriott International and a Chinese insurance giant, and it’s likely not over yet.
First, a recap:
- Starwood, which owns brands including Westin, St. Regis, and Four Points, in November agreed to be bought by Marriott in a deal that valued it at $79.88 per share. That offer later declined in value, though, because it was based in part on Marriott’s own stock price, which had dropped in value.
- Starwood Hotels & Resorts Worldwide confirmed last week it got an attractive takeover offer from a group of companies led by the Chinese insurer Anbang, which has been on a deal spree since buying the Waldorf Astoria 18 months ago.
- Anbang swooped in, first offering $76 per share in cash, and then on Friday boosting that offer to $78.
- Marriott turned around on Monday and boosted its bid for Starwood. The announcement, based on Friday’s closing prices, valued Starwood at $79.53 per share.
Now the question is: Will Anbang come back with another counter-offer?
The answer is: Most likely.
Sachin Shah, a merger arbitrage strategist at Albert Fried & Co., points out that Marriott’s stock again dropped in value on Monday. By the close, its offer for Starwood had dropped in value to about $78.85 per share — not much higher than Anbang’s $78 offer.
Of note, the latest offer also boosted the termination fee from $400 million to $450 million.
The question is whether Anbang is likely to drop everything over a share price difference of a little under a dollar, plus an additional $50 million in termination fees?
“That to me seems unlikely,” Shah said.
Anbang is a company that knows what it’s getting into, and the additional $50 million in termination fees is not the sort of thing that typically fazes the company.
Earlier this month when it bought Strategic Hotels & Resorts from Blackstone Group, for example, Anbang paid $450 million more than Blackstone had paid last year, with the understanding that it was a good long-term move.
These deal has broader significance. Chinese companies have been on a buying spree of late, and are increasingly finding themself in competition with Western buyers. When it comes to financials, they often have an advantage.
Chinese buyers simply don’t play by the same rules as Western bidders. They’re able to take a longer-term view on value, and are less likely to have vocal shareholders banging on their door if they overpay. Brand names and goods can be sold across a giant domestic market after an acquisition, and Chinese bidders rarely compete with another.
Playing the long game
“I’ve always been impressed by generally Asian buyers and specifically Chinese buyers, how long term they are in their thinking,” said JPMorgan’s global cohead of mergers and acquisitions, Hernan Cristerna, in a Bloomberg interview in February.
“They don’t think in terms of the next four or eight quarters, they think in terms of the next four or eight years. So it’s very long-term thinking, and there’s a real strategic, industrial intent behind their moves and acquisitions.”
That is in sharp contrast to Marriott.
While Marriott pledged in its latest offer that the transaction would be “roughly neutral to adjusted earnings per share in 2017 and 2018,” Anbang, which is backed by the longterm-thinking Chinese government, does not need to make such promises to shareholders.
It’s unlikely Marriott would be able to make another offer and keep that promise, while its stock continues to drop.
Of course, it is possible that Anbang will back away. US targets will often put the certainty of a deal ahead going ahead above financial terms, and deals with Chinese buyers are considered more complex. There is always the chance of regulatory intervention in a deal.
But right now Marriott’s back is against the wall and the Chinese insurer seems to be in a much more comfortable place.
“It seems that if they sincerely do have the support of the government and they are extremely long-term thinking — not 2017, 2018, more like 2020, 2025 kind of thinking — why wouldn’t they be able to be in a position to increase the offer to get a deal done?” Shah said.