Six months ago I speculated on what a Starwood-IHG (or Wyndham) merger would look like.
Three months ago market excitement ratcheted up over an IHG-Starwood combination, although that culminated in word from IHG that talks ended without a deal — although Starwood remained a potential acquisition target for Wyndham and Accor.
Now according to the Wall Street Journal, three Chinese companies are seeking permission of the Chinese government to make an offer for Starwood.
These three are:
- Shanghai Jin Jiang International Hotels
- China Investment Corp (sovereign wealth fund)
- HNA Group (which owns Hainan Airlines)
Breakfast at the Westin Macau
The first two are state entities, while the third is part-owned by the government. Any offer would be for more than $12 billion — the most ever paid by a Chinese company for a US firm.
The Chinese Commerce Ministry and National Development and Reform Commission must approve the offer, and would likely only approve one to prevent Chinese firms from bidding against each other and driving an the eventual sale price. (Any deal would also likely require US government approval as well.)
There are certainly conflicting goals at play and it will be interesting to see if a firm Chinese offer is ultimately made for Starwood:
- Doing the biggest Chinese acquisition of a US firm at this time is indicative of the limited growth investment projects inside China at the moment. They need to search for growth plays abroad with the slowing Chinese economy. Jin Jiang’s hotels are almost exclusively in China, a market that has begun to underperform.
- Chinese state-owned enterprises have been in search of cash to deploy domestically as part of the government’s strategy to prop up the economy as growth slows. Whether they’ll part with over $12 billion remains to be seen.
(This video does a good job explaining the challenges faced by the Chinese economy.)
Sheraton Macau is Part of a Larger Complex with Conrad and Holiday Inn
Conventional wisdom has been that Starwood is going to do a deal. Starwood has struggled to generate growth. Fundamentally that’s why their CEO Frits van Paasschen was out in February.
- The Sheraton brand, which they’ve announced investments in, is inconsistent — it doesn’t signal much about the property you’re going to visit, other than a good bed. The quality is all over the map in most of the world (although generally excellent in Asia).
- Everyone wants a lifestyle brand, and Starwood has a pioneering one in W… that’s hardly growing.
- They hadn’t introduced a new brand in about 8 years, and none of the most recent ones have been engines of growth. Their new Tribute brand is likely to add about 1% growth per year — if it meets expectations.
Westin is a consistent, quality brand. St. Regis is for the most part but theirs isn’t a segment that’s going to drive growth either.
Most in the hotel industry see ‘select service’ as the biggest area of growth, and that’s Starwood’s weakest component. It’s also why most of the tie-up speculation has centered around companies that are stronger in that area.
Starwood retained mergers and acquisitions advisors.
View from the Royal Orchid Sheraton, Bangkok
My own view is that short-sightedly an IHG or Wyndham deal would excite investors but could be a real mess, with a hodge podge of a customer-facing loyalty program integration (IHG properties have little brand consistency overall in my view) or a bifurcated program which only serves to confuse consumers and limit synergies. An acquisition by a Chinese firm avoids many of these concerns.
Whatever deal does or doesn’t happen:
- In the near-term little will change
- Consumers will make out fine if Starwood’s brand and loyalty program survives. That’s likely with a Chinese acquisition, less likely in a deal with Wyndham, IHG, or Accor.