As Starwood sale buzz swirls, stock price soars

If there's one thing that can be said about the ongoing, not-so-hushed talks about the—what now looks like a certainty—sale of Starwood Hotels & Resorts Worldwide, it's that it's been a boon for its stock price.

HOT soared for a second straight day as rumors of a cash-and-stock buy by Hyatt Hotels Corp. was imminent. Starwood shares jumped 6.3 percent to close at 79.50 on the stock market yesterday—and were as high as 82.83 earlier in the day.

Meanwhile, Hyatt shares opened sharply higher, though they later turned negative, falling 1.8 percent to finish at 49.63.

In addition to Hyatt, three Chinese companies have been mentioned as showing interest.

Any acquisition of Starwood would give the buyer higher international exposure, as half of Starwood's portfolio is estimated to be outside the U.S., something that has hampered the Stamford, Conn.-based hotel company, whose brands include W, Sheraton, Aloft and St. Regis.

Why the Worry
What's really done Starwood in has been its lack of success in the midscale market compared to competitors Hilton Worldwide and Marriott International, both of which have thrived. In addition, its largest brand, Sheraton, has underperformed, prompting the company to tweak it earlier this year. Sheraton represents more than 40 percent of Starwood's entire room inventory

For its part, Hyatt, too, is thin in the midscale category—where, in fact, it doesn't have any brands, according to STR. Its current crop of brands play in upscale through luxury. An acquisition of Starwood would increase Hyatt's select-service brands to include Aloft, Element and Four Points. Those would complement Hyatt Place and Hyatt House.

Since former Starwood CEO Frits van Paasschen left, the company has been exploring various reorganization options under the guidance of interim CEO Adam Aron.

One move that has come to fruition is Interval Leisure Group's buy of Starwood's vacation ownership business, which is valued at about $1.5 billion. Interval said a unit would buy the business, Vistana Signature Experiences, after Starwood spins it off.

The deal will give ILG exclusive rights to Starwood's Sheraton and Westin brands in the vacation ownership market.

On completion of the deal, Starwood shareholders will own about 55 percent of the combined vacation ownership business on a fully diluted basis and ILG shareholders will own the rest.

On Starwood's Q3 call, Aron played up the company's successes. "Our renewed and energized attention to our brands, our hotels, our people, and especially our hotel owners and franchisees is paying off," he said, noting that from January through September, Starwood opened 68 new hotels. Year-to-date through the end of the third quarter, Aron said Starwood signed 141 new hotel deals representing 29,000 rooms.

Aron also played up Starwood's asset-light focus. "During the quarter, we sold The Westin Excelsior Rome for $251 million, bringing the total hotel sales achieved in 2015 to $817 million. We exceeded our goal of $800 million in gross sale proceeds for the full year, and this milestone was achieved three and a half months early."

The planned sale of owned assets will continue, according to Aron. "We have a significant number of other owned hotel assets that are actively being marketed throughout the world," he said. "We would characterize hotel buyer interest as robust, especially in some of the high-quality assets in our stable."

Folded into the Q3 call was Aron noting that Design Hotels would become Starwood's 11th brand. Starwood became a passive investor in Design Hotels, a collection of design-driven independent hotels, back in 2011. "Even with the investment, we left Design Hotels to remain at arm's length from Starwood," Aron said. "Now we are transforming the relationship."

According to Aron, individual Design Hotels will have the opportunity to become full-blown marketing partners within the Starwood system, participating in reservations displays and Starwood's frequent guest program, SPG.

"Naturally, Starwood's fee stream will rise markedly in exchange for these hotels getting to reap these considerably increased Starwood distribution and loyalty benefits," Aron said.

Global Look
In the U.S., Starwood's RevPAR was up 5.1 percent overall, "and we saw double-digit RevPAR increases in a number of markets including Los Angeles, Phoenix, and Orlando," said Starwood CFO Tom Mangas. New York was not a strong point, however. "It continues to face an oversupply situation and pressure from lower volumes of inbound international travelers due to the strong dollar," Mangas said. RevPAR was up 1.6 percent.  

Outside the U.S., while Latin America disappointed in the third-quarter, Europe did not. RevPAR was up 10 percent. "Europe has been on fire for us, particularly over the summer holiday seasons, with Europe on sale," Mangas said.

Meanwhile, Greater China saw a 2.6-percent drop in constant dollar RevPAR. Hong Kong's RevPAR was down over 10 percent, driven partly by their strong currency, Starwood CFO Tom Mangas said. RevPAR at Mainland China hotels grew 1.7 percent.

On Airbnb
Similar to what Hilton Worldwide claimed on its Q3 call, Starwood remains not heavily concerned over Airbnb. "As we've talked to our corporate clients, we don't Airbnb as a particular threat to that business today," Mangas said. "Maybe their business model evolves, but given the kind of services that we're providing at our hotels and what we believe our corporate clients want, we believe that's a low-risk threat to our business."

Added Aron: "Airbnb is real. It's here to stay. The hotel industry as an industry has some issues with Airbnb on things like collecting accommodations tax and other issues. But I think we all have to (technical difficulty) internalize that the shared economy is part of the way the world will work in the 21st century. Airbnb has been growing gangbusters in 2015. It hasn't stopped Starwood from reporting three strong quarters in a row.

"I do believe that the world's hospitality industry is large enough that it can accommodate Airbnb as a major player, as there are dozens of major players in the world's hotel industry today. We—not only Starwood, but anyone in the industry—will be able to be a strong competitor even with Airbnb alongside."