LEISURE: Anbang’s Rival Bid for Starwood Set to Fail

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Bottom line: Starwood will ultimately reject a rival bid for itself by Chinese insurer Anbang, though earlier suitor Marriott may have to raise its original offer in order to close a deal.

Anbang makes counter bid for Starwood

China is shaping up as spoiler in the biggest US hotel merger of all time, with word that Chinese insurance company Anbang has made a surprise counter bid for Starwood (NYSE: HOT), operator of the Sheraton and Westin brands. The bid comes as the struggling Starwood was preparing to sell itself to larger and better-run US rival Marriott (NYSE: MAR), whose original offer is about 5 percent lower than Anbang’s. The latest twist also comes just a day after media reported that Anbang was in talks for another blockbuster deal to buy Strategic Hotels & Resorts, owner of a portfolio of US luxury hotels, in a deal valued at $6.5 billion.

I previously said that Anbang appears to be a company with too much cash, and would add that it doesn’t seem to have a very strong understanding of the hotel business. Put simply, Anbang seems to be suddenly smitten with any asset containing the word “hotel”, since Strategic and Starwood are very different types of companies. Whereas Strategic is largely a property owner, Starwood earns most of its money from managing hotels under its brands in buildings owned by other companies.

All that said, I’ll begin with my own bottom line that Starwood is almost certain to ultimately reject Anbang’s offer because it knows its outlook with the Chinese company would be far riskier than a safer future with Marriott. At the same time, Marriott may have to raise its offer slightly to come closer to Anbang’s, which I expect will also happen.

Let’s begin with the latest surprise development, which saw Anbang offer $76 for each Starwood share, trumping Marriott’s earlier bid valued at $72.08 per share. (English article; Chinese article) Anbang’s bid was actually at least the third expression of interest by a Chinese buyer for Starwood, after media reported last fall that domestic hotel operator Jin Jiang (HKEx: 2006; Shanghai: 600754) and Chinese sovereign wealth fund CIC were also exploring bids. (previous post)

Starwood ultimately rejected those earlier suitors and chose to go with Marriott, in a deal that is now worth about $11 billion. Following the approach by Anbang, Marriott agreed to a waiver that would allow Starwood to enter talks to be acquired by the Chinese company. Other members of the Anbang buying group would include western private equity firms JC Flowers and Primavera Capital.

Global Buying Spree

Anbang has been on a hotel buying binge lately, starting with its surprise successful bid for the storied Waldorf Astoria in New York last year. Anbang paid a hefty price of nearly $2 billion for that property, and would be paying another $4 billion for the Strategic Hotels portfolio. I expect the Starwood bid would probably cost it another $6 billion, meaning those 3 deals alone would cost it more than $10 billion.

Shareholders certainly seemed to like the latest development, with Starwood stock rising nearly 8 percent to $75.93 after the latest Anbang bid was announced. That would certainly seem to indicate the market expects a counter bid from Marriott, and possibly a bidding war to erupt.

But in this case I really do need to take a contrarian view and say that Marriott won’t try to match the Anbang price, even though it may raise its original offer to as much as $74 per share. That’s because Marriott is quite confident that Starwood’s managers will ultimately do what’s best for the company over the long-term and not just look to make a few extra dollars in the immediate future.

From that perspective, Marriott is far and away the better bedfellow for Starwood, and both companies know that. As an insurance company and large institutional investor, Anbang may be well suited to owning real estate like the Strategic portfolio and Waldorf. But it is totally inexperienced at the more complex business of hotel management, and for that reason would probably be a disastrous future owner of Starwood.

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