In their own words: Sorenson and Mangas talk Marriott-Starwood merger

Starwood Merger

This morning, just hours after announcing that Anbang had withdrawn its bid for Starwood Hotels & Resorts, Arne Sorenson, president and CEO of Marriott International, sat down with Starwood CEO Thomas Mangas to bring shareholders up to date on the latest developments. In his own words, Sorenson shared Marriott's side of the bidding war, while Mangas emphasized that Anbang was serious in its quest to acquire the company.

Sorenson: We have zero buyer's remorse. We’re excited to be moving forward towards the approval of this transaction with the shareholder votes…None of us at Marriott has had a conversation with Anbang or communication with Anbang, so what we know, we know either because of what Starwood has told us, because we have been continuing to communicate with them through this process or what we've read about in the paper.

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I would characterize [the transaction that was announced in November] as a great deal for Marriott. It was also, I think, a fair deal for Starwood—one that was the result of a long process of being available for companies to look at and bid for and I think they made a very thoughtful reasoned decision, that proposal was the best one that has been available in the market.

From November until roughly the beginning of March, we were focused both with regulatory process initially with the SEC to get approval of the proxy and other offering documents with the FTC for any trust approval… We were well underway towards a shareholder meeting, which was then scheduled for March 28 with documents that have been approved by the SEC. And all was proceeding well, we were just about two weeks and one business day away from the shareholders' vote and maybe starting finally to relax since the first danger I suppose.

And then about two weeks before that bid, Anbang resurfaced…initially with a $76 bid, but it became a $78 transaction, which they negotiated with Starwood. It was, essentially, fully financed and essentially non-conditional. (There were some elements there, but the big risks did not exist in the that deal.) 

And in many respects, it was breathtaking when we read it. So Starwood came to us and said, "Not only have they surfaced, but they have taken the steps they need to take to show that the money is there and that they will close this transaction."  And they gave us a notice that they intend to terminate our contract and proceed with [Anbang]. That gave us then a number of days to respond. We immediately got to work with our Board and of course we've had few days between when Anbang first surfaced and when the deal was negotiated to start to think about this roughly a week.

But we got to work with our board and ultimately decided to come back with another proposal, which had a value of $79.53. Obviously, it's a higher valuation, and it included a couple of things that made it a better transaction for us than the prior. One is, by this point in time we had gotten more confident about the synergies that we could achieve by pulling these two companies together, and so when we talked in November, it was $200 million. We now believe $250 million is achievable.

The second advantage was that we had shifted more of consideration that we would pay to Starwood shareholders to cash. In November, it was $2 per share of cash. In this last proposal, it was $21 per share of cash. 

And thirdly, we had taken advantage of some strength in our stock price, particularly the week before we made that proposal. Put all those things together, and we ended up with a proposal that we thought was a very strong deal for us.

To be fair, we admit it, it was not as good a deal for us as the deal that we announced in November and Anbang’s arrival on the scene and offer of a highly credible $78 all-cash deal did require us to increase our price. At the same time, though, we were convinced it was a good deal, we were convinced we could create strong value for our shareholders and for the shareholders of [Starwood] by accomplishing what we think can be accomplished here.

And then, of course, in the last week, you see Anbang resurface with…a price conversation around $82.75. Based on what Starwood has told us, Anbang did not deliver the same kinds of undertakings or arrangements that allowed the Starwood Board to conclude that they were credible at the $82.75, and yesterday, Anbang communicated definitely that they were pulling out of the process.

And so here we are—moving towards shareholder meetings next April. We have the only binding deal with Starwood. Again, most of the conditions prior to closing have been satisfied. There are a few that are still outstanding. We're waiting for EU approval for example on anti-competition ground that we need the same thing from China. Starwood needs to complete its timeshare spinoff. These are a few of the things that are underway, but because our market share numbers for example in Europe and China are quite light. We would not expect those to be meaningful issues.

Mangas: Having sat across the table from Chairman Wu at Anbang, they are a very formidable and incredible counterpart here that had delivered a superior binding proposal and I want you to know that having seen them in action, they are very credible, they moved mountains to persuade our Board. They moved quickly and were incredibly shrewd. They worked with us to get a deal done quickly.

So I wanted to assure you that we worked in good faith to drive as much value for this transaction for our shareholders as we could. And certainly, we were disappointed when we couldn't take a final step and they withdrew from the process yesterday, but all along, our shareholders have been encouraged to support the Marriott deal and we continue to support the Marriott deal, as it’s the best deal for our shareholders.

Sorenson: I think the most exciting thing from a strategic perspective remains the power of these loyalty programs, SGP and Marriott Rewards. In the four months or so that we've been working together to get towards integration. We have been impressed by the loyalty that SPG members have for Starwood and its hotels.

Now, there are still many things we don’t know. Because we have been competing, we have not seen the financial models of the SPG program. We have not taken those kinds of steps, but from the moment we announced the transaction, we have seen a very robust debate among SPG members about "What is going to happen to our points?" and "Is it good for me or is it bad for me?" and we’ve seen some of the same kind of conversation from the Marriott Rewards folks.

I’ll give you two examples about how to think about the revenue upside associated with these programs and the combination of the companies. One, think about lift, the immediate lift for Marriott hotels. One of the challenges Starwood has had forever, really, is [that] their distribution has not been broad enough to be able to offer SPG customers a places to say in many markets or for different reasons of their trip. And so because they have only 1,200 hotels something, too often an SPG member would say, "I’m going to a market in which there is no Starwood hotel or in which the only Starwood hotel does not have capacity or is maybe sold out or something else."

And by being part of this bigger company, those folks will immediately have 4,500 more hotels to stay in, and as a consequence, this combined company will capture more share of wallet from those Starwood company customers. I think, in many respects, we can say the same thing about sort of the index performance. So if you think about potential lift to Starwood hotels, we think there are probably something like 9.4 points of difference between Marriott’s average RevPAR index and Starwood brand average RevPAR index.

Transcription courtesy Seeking Alpha

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