Hospitality Sector Update 11/8/2015

“Fate of Starwood Potentially in Chinese Hands”

The fate of Starwood Hotels and Resorts Inc., a multibillion-dollar player in the hospitality industry, is essentially up for grabs. Starwood’s Chief Executive, Frits van Paasschen, left the company in February due to the Board’s loss of confidence in his ability to further its expansion. After his departure, Starwood hired the investment bank Lazard to evaluate potential strategies for growth, such as a merger or sale. Since then, several companies from around the world have made offers to either buy a large stake in or completely purchase Starwood. Three large Chinese companies – Shanghai Jin Jiang International Hotels Co., HNA group, and sovereign-wealth fund China Investment Corp. (“CIC”) – are competing against each other to have the right to make a bid to acquire Starwood, a right which is given by the Chinese Government as all of these companies are at least partially owned by the state. The face that only one company will be able to make a bid works to the companies’ benefit because it will eliminate the risk of the price being driven up by several bidders. It is important to note that although one of the companies will win the right to bid, if the price is too high they will most likely not follow through with a purchase. While there is no concrete price, people familiar with the discussions believe a bid would have to be greater than Starwood’s market value of just under $12 billion. If the deal is approved, it would surpass the largest acquisition by a Chinese entity of a U.S. company by over $5 billion, which was made by CIC for a 9.9% stake in Morgan Stanley for $5.6 billion. This trend of Chinese entities acquiring U.S. companies is not new; Anbang Insurance Group Co. purchased the Waldorf-Astoria Hotel for nearly $2 billion in February of 2015 and Sunshine Insurance Group Co. (another Chinese insurer) paid approximately $230 million for the Baccarat Hotel in New York also in February of this year. On the U.S. side of the deal, the Committee on Foreign Investment would have to approve any purchase of Starwood by a Chinese company, making Starwood’s future even more murky and uncertain.

“Cost of Upgrades Determining Your Brand”

An emerging trend in the hospitality industry is large hotel operators focusing on existing hotel owners who want to upgrade to their brands as inexpensively as possible. Both Hilton Worldwide Holdings Inc. and Marriott International Inc. are entrenched in the continuing battle to dominate the so-called conversion market. The conversion market is characterized by hotel owners switching flags – a Marriott hotel changing to a DoubleTree by Hilton, for instance – in order to secure greater flexibility and lower costs with respect to property improvements. This has been a great strategy as DoubleTree has doubled its room count since 2007. Marriott, realizing the potential in this market, recently purchased Delta Hotels and Resorts, a Canadian brand, with the goal of using it as its own DoubleTree. The use of the Delta Brand, as opposed to the Marriott brand, is practical because Delta can offer more flexibility on improvements and will save the hotel owners millions of dollars in minor improvements, such as types of showers and central air conditioning versus in-wall air conditioning systems. These conversion brands, DoubleTree and Delta, also have an edge in the sense that they focus on secondary markets (small towns) rather than primary markets (gateway cities, resorts, airports). In the secondary markets, the flexibility offered by conversion brands leading to cheaper renovations is extremely useful as expensive upgrades are not optimal given the smaller revenue typically generated by those hotels.