Dealpolitik: Can Marriott Still Win Big Even if It Loses Starwood?

ENLARGE

Photo: FRED DUFOUR/AFP/Getty Images

Even if Marriott International can still compete in the bidding war for Starwood Hotels & Resorts Worldwide, it has to be worried that, in the end, China’s Anbang Insurance Group Co. will be willing to pay more. So Marriott must be asking itself, in addition to “How can we win the bidding war?” the following question: “Is there a way to win more even if we lose?”

Starwood said Friday it’s ready to throw over Marriott’s existing cash-and-stock offer, valued at $65.33 per Starwood share, in favor of a $78 per share in cash from the Anbang-led bidding group. If Marriott drops out of the bidding today, it’s entitled to a $400 million breakup fee, a cost that ultimately would be borne by Anbang. But if it rebids, Marriott could condition its new offer on a bigger breakup fee — which could allow it to regain the upper hand as the bidding war intensifies or give it a jumbo consolation prize if it eventually loses.

Marriott starts with a bidding advantage, not only because of the breakup fee but because it has a head start, having signed up its deal last November. Shareholders like their purchase price sooner rather than later. In addition, although Starwood said Anbang’s bid has “a high degree of closing certainty” there is probably still less closing risk in the Marriott deal. Anbang’s ties to China, its massive financing package for the deal (even if already committed) and a group bid could make Marriott’s offer look like the safer bet.

Thus, bidders in Marriott’s position generally just need to match a competing bid in order to get back into the lead. Here it is a bit more complex because what is deemed matching would be a matter of judgment for the Starwood board. The Anbang deal is all cash, and most of Marriott’s consideration consists of its stock, making it largely tax free. The Starwood board would need to weigh the two forms of consideration, assuming Marriott doesn’t come back with a blowout offer.

Here’s one way Marriott could try to improve its position, depending on what price it’s willing to pay for Starwood.

Marriott could propose to the Starwood board a choice of deals. The first alternative would be for Marriott to match Anbang’s $78 bid, conditioned on paying an enhanced breakup fee of around $480 million if Anbang later beats Marriott’s price, a 20% increase that tracks the higher bid. If Starwood accepts, Marriott would get the higher payout even if it ultimately loses to Anbang.

Marriott could also propose a higher price, say $82 per share, but in return insist on a substantially increased breakup fee. Marriott could say, for example, that it’s only willing to pay the higher price if the new breakup fee is $600 million or even more. That would both improve Marriott’s advantage in future bidding and substantially increase its consolation prize if Anbang wins. Starwood’s board would have to give that offer some serious thought without knowing whether Anbang might be willing to beat it.. Confidentially obligations likely would bar Starwood from taking a Marriott offer to Anbang before signing up a deal even though if accepted it will effectively reduce Anbang’s future bidding ability.

Of course, Anbang may have prepared for such a tactical move by Marriott by giving Starwood an indication of its willingness to increase its bid if Marriott rebids–sometimes called a ratchet. We might not know about that until after the bidding is completed and regulatory filings are made with detailed background information. A ratchet provision or informal indication would raise even more complex issues, including whether Starwood would be required to inform Marriott of Anbang’s pricing indication as a result of terms of the existing merger agreement.

With Starwood’s notice on Friday that it is willing to walk away from the current Marriott deal, the next move is Marriott’s. If it is willing to pay up, it faces tactical issues well beyond the price it next names.

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