Starwood Hotels (HOT) shares were cashing in Monday after the hotel operator checked out of its unsolicited merger agreement with a consortium led by China's Anbang Insurance Group, and instead agreed to an upgraded bid from its original merger partner, Marriott International (MAR).
But Marriott shareholders shouldnt rejoice yet, as there is the very real possibility that the bidding war is not over.
Because Anbang's all-cash deal appears to be more lucrative in the short-term, Real Money's Jim Cramer doesn't believe that we have seen the last of Anbang in this scenario.
"The communist party in China understands the value of Starwood better than Marriott does," Cramer said. "Starwood's loyalty program is extremely attractive for any prospective buyers."
If Anbang is indeed looking to make a big splash in the hotel market, and all signs point to the probability that the to-this-point nondescript insurance company has the backing of the Chinese government, they could come back with an even bigger offer for Starwood.
However, the probability of an upsized Anbang bid is something that Marriott CEO Arne Sorenson seems prepared for. When asked by CNBC whether Marriott has told Starwood that this will be a final offer, Marriott CEO Arne Sorenson responded, "No, we haven't. We have teed up something which not only values extremely well with the market today ... but it also offers a unique upside in the future."
Bloomberg Insider analyst Margaret Huang mirrored Sorenson's views, writing Friday that any short-term value from an Anbang/Starwood merger would be overshadowed by the long-term value of a Marriott tie-up.
"Anbang's all-cash offer for Starwood may appeal to the short-term investors, yet the long-term growth potential with Marriot offers Starwood the resources it needs to accelerate its growth," wrote Huang on Friday. "For both (Starwood and Marriott), the combined entity would likely broaden their networks, bolster their brands, enhance their pricing power and reduce their costs. Anbang would face obstacles to achieve these benefits."
The combined company would be the largest hotel chain in the world with approximately 5,700 hotels and seemingly infinite room for growth.
Starwood shareholders will receive $21 and 0.80 shares or Marriott Class A shares for every share of Starwood they own, in a deal that values the company at about $13.6 billion. One of the main sticking points of the upgraded bid is the cash consideration. The original Marriott bid only offered $2 per share in cash vs. the new bid's $21 per share offer.
Starwood shares were up more than 4% on triple its daily volume in midday trading. Despite the seemingly good news, Marriott shares were falling -- down more than 1% -- in trading on Monday, and there could be numerous reasons for the decline.
"Shares of Marriott are underperforming the market today on the news, which seems to indicate that shareholders continue to dislike this merger. Some key investors had already been outspoken against the initial deal, so we can only imagine how they feel now that Marriott was willing to up the bid," said Action Alerts PLUS senior analyst Scott Berman. "A part of this is likely the fear that we could be at the beginning of a drawn-out bidding war and part of it is that investors do not want to deal with the complexity that accompanies a deal of this magnitude."
Sorenson's comments confirm that the new deal is not as sweet as its original bid for Starwood. "We think our bid is about 15% higher than our last one. I would also acknowledge that the proposal we signed last night is not as good for us as the deal we signed and announced in November," Sorenson said. "The deal we signed in November in retrospect may have been too good a deal."
While Marriott has won this battle in the symbolic tug of war for Starwood, there may be more pull to come out of China. Proponents of the deal should not rejoice until the ink is dry and the merger is official.
