Last Thursday, the Anbang-led buyer consortium walked away from its attempted merger with Starwood Hotels (HOT) leaving Marriott's (MAR) standing offer the only deal on the table.
Earlier this week, the companies held an investor meeting to reaffirm their commitment to the merger. Both Marriott and Starwood will hold shareholder votes on April 8 and, if confirmed, the transaction could take place sometime in the second half of the year. Marriott will pay Starwood shareholders $79.53 per share for a total of $13.6 billion ex-timeshare company Vistana (or $85.36 including Vistana). Marriott expects the deal to be neutral to earnings in the short run and accretive by 2017.
The merger would create the largest lodging company in the United States, with approximately 5,700 hotels around the world and over 1.1 million rooms. It will offer 30 brands, including a big position in luxury and lifestyle hotels, like the St. Regis and W Hotels.
The companies believe they can squeeze out as much as $250 million in duplicate expense, as early as 2018. Both management teams are excited to combine the customer loyalty programs that would give one another access to millions of customers. Marriott boasts 55 million rewards members, while Starwood has 21 million preferred guest members.
Marriott has an especially efficient sales force that targets large corporations and believes both brands can benefit from the combination.
Marriott reiterated guidance for comparable system-wide revenue per available room (RevPAR) growth of 2% to 4% for the first quarter and 3% to 5% for the full year. Year-to-date, in constant dollars, the company reported RevPAR at 3.4% in North America and 3.9% outside North America, and 3.5% worldwide.
Marriott and Starwood have sold most of their hotel properties to franchisees and simply collect management and performance fees for running the hotels. This "asset light" allows the companies to earn a higher return on invested capital, lower their capital requirements and support higher margins. It also helps to offload the seasonality of the business to someone else.
On a pro-forma basis, the combined companies would probably report full-year 2016 revenue of $4.9 billion and EBITDA of $2.7 billion. Net income is expected to be around $1.3 billion and earnings per share could be as high as $3.85. Once the companies get their house in order, revenue should begin to ramp nicely. For example, revenue could be up 16% next year and the cost savings from the deal could drop right to the bottom line. Operating income next year could grow 22% to $2.8 billion. Earnings could reach $4.30 in 2017.
In the last year, hotel multiples have been crushed, as investors worried about the strong dollar and a slowdown in tourism. I think Marriott can trade to the mid $70s (17-18x 2017 estimates) as investors begin to give the combined company a higher multiple because of better earnings growth.