The global hotel industry is expected to see continued year-over-year growth. This could prove especially lucrative to the companies involved in a new merger that would create the world's largest hotel chain, boasting more than 30 lodging brands and more than 1 million rooms. Could this create a great growth play for your portfolio?
Today, Starwood Hotels & Resorts Worldwide (HOT) announced that it has agreed to a deal with Marriott International (MAR - Get Report) that will be worth $13.6 billion. Although still subject to shareholder approval (and Chinese rival Anbang Insurance Group could always bid higher), the merger will involve shareholders receiving $21 in cash and 0.8 shares of Marriott's common stock for each Starwood share owned.
The path to the agreement has been somewhat rocky. Last week, a proposed deal between the two hotel chains was called off when Chinese behemoth Anbang Insurance Group jumped in with its own offer. The original Starwood-Marriott deal had involved $2 in cash and 0.92 shares of Marriott for each Starwood share owned. Anbang's Friday offer was for $78 in cash, worth in total roughly $13.2 billion.
Penalties for the breakup of this new deal are stiff. If Starwood cancels the merger for another buyer, it will need to pay $450 million, in addition to as much as $18 million owed to Marriott for deal financing costs.
Arne Sorenson, Marriott's CEO, said in a statement that the joined companies expect as much as $250 million in annual cost savings from this deal.
Starwood's brands include the blockbuster Sheraton chain, as well as Westin and a portfolio of boutique, luxury, and historic hotels. Marriott is the owner of travelers' favorites Courtyard by Marriott and Residence Inn. The newly created hotel chain will consist of a strong mix of lodgings for every budget and occasion, making Marriott stock perfectly suited for your long-term wealth building needs.
Anbang, meanwhile, has been on a hotel-buying spree, recently purchasing the word-famous Waldorf Astoria in New York City for almost $2 billion and entering into an agreement to buy Strategic Hotels & Resorts from the Blackstone Group for nearly $6.5 billion.
Marriott shares are currently priced at around $72, down from their 52-week high of $85 last March. The company has strong fundamentals and a history of revenue growth. Starwood is currently priced around $84. It's been lagging behind its peers in terms of growth and performance, which has been the driving force to open itself up to a merger in the first place.
Worldwide, hotel industry revenue is expected to reach $550 billion in 2016, versus $457 billion five years ago. If the deal sticks, Marriott will experience exponential growth as it grabs a bigger piece of that pie. With shares prices of both stocks currently on the low side, now's a great and pretty safe opportunity to get in on some merger action. You could purchase shares of Starwood in anticipation of the deal, or place a bet on Marriott and wait for what could turn out to be one of the biggest growth plays of the decade.
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