Fitch Ratings-New York-22 March 2016: Fitch Ratings continues to see positive ratings momentum for Marriott International stemming from its planned merger with Starwood Hotels & Resorts. However, less creditor friendly financial terms associated with Marriott's revised offer for Starwood increases execution risk and will likely delay the conclusion of our Positive Outlook towards the latter part of the one- to two-year Rating Outlook horizon.
Fitch estimates that Marriott's leverage will increase to the mid-3.0x range at merger closing and return to within the company's 3.0x to 3.25x policy target by year-end 2016. The company's revised $13.6 billion consideration for Starwood, net of $900 million of Starwood cash, includes a $3.6 billion cash component (up from a negligible amount previously) that Marriott plans to fund with a similar amount of borrowings.
Fitch believes the company is committed to its 3.0x to 3.25x leverage policy target, and Marriott demonstrated its willingness and ability to reign in share repurchases during the Great Recession. The company did not repurchase any shares during 2009 and 2010, which allowed for $1.3 billion of debt reduction.
MORE EXECUTION RISK Fitch sees more merger-related execution risk from Marriott's revised offer. Increasing the cash component is a riskier strategy, particularly in the context of an extended lodging cycle where revenue growth is slowing and supply is accelerating.
Marriott will need to execute on asset sales and pull back on share repurchases to return leverage to within its policy target range by the end of this year. Volatile capital markets could make selling Starwood's roughly $2.3 billion owned-hotel portfolio more challenging, although Fitch believes the high-quality portfolio of assets will generate strong institutional investor interest. Marriott could also face pressure from equity investors to sustain a higher level of share repurchases and delay de-leveraging during the year, depending on how its shares perform.
Marriott boosted its merger related cost savings synergies target to $250 million from $200 million in tandem with announcing its revised Starwood merger offer. The company also gave more deference to potential revenue synergies through enhanced RevPAR penetration for Starwood brands and new unit growth, although the company has not included revenue synergies in its guidance.
MERGER BENEFITS UNCHANGED Fitch affirmed its 'BBB' long-term Issuer Default Rating (IDR) and 'F2' short-term IDR for Marriott and revised the company's Rating Outlook to Positive from Stable on Nov. 16, 2015, following the company's Starwood acquisition announcement. Fitch believes Marriott's credit profile will be more consistent with a 'BBB+' IDR after combining with Starwood, notwithstanding its unchanged financial policy that includes managing adjusted leverage at its stated 3.0x to 3.25x target.
Fitch expects the acquisition to lower Marriott's business risk profile and improve profitability, which should enhance the company's ability to navigate future lodging cycle downturns. The combined company will have the largest high-quality, internationally recognized brand portfolio in the industry (30 brands). Acquiring Starwood will also enhance Marriott's position in advanced emerging markets.
Fitch would likely revise its Rating Outlook for Marriott International to Stable from Positive if Starwood Hotels & Resorts, Inc. terminates its merger agreement with the company to pursue a competing, higher bid.
NOT A DONE DEAL Marriott's revised offer follows Starwood's notification to the company that its board of directors determined an alternative purchase offer from an investor consortium led by Chinese insurer Anbang Insurance Group, Inc. of $78 per share to be a superior proposal. Starwood simultaneously notified Marriott that it intended to terminate the previous merger agreement with Marriott unless Marriott and Starwood agree on revisions to their merger agreement that Starwood's board of directors determines to be superior to the investor-consortium's proposal.
Fitch understands that Starwood can entertain a revised offer from the Anbang consortium along a similar process and timeline as it did previously. Marriott and Starwood shareholders will vote on the merger on April 8, 2016. The company's revised offer provides for a $450 million break-up fee payable by Starwood to Marriott in certain circumstances, as well as reimbursement of up to $18 million of financing related merger costs incurred by Marriott.
Contact: Primary Analyst Stephen Boyd, CFA Senior Director +1-212-908-9153 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004
Secondary Analyst Michael Paladino, CFA Managing Director +1-212-908-9113
