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An Interloper Enters the Starwood-Marriott Deal

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The Starwood-Marriott transaction gets competitive

On March 14, Starwood Hotels & Resorts Worldwide (HOT) announced that it received an unsolicited takeover approach from a consortium of investors led by China’s Anbang Insurance Group. The approach is nonbinding and preliminary. Starwood issued a standard “stop, look, and listen” press release that morning saying that it has entered into discussions with Anbang.

Starwood’s merger partner, Marriott International (MAR), has granted permission to Starwood to enter into discussions with Anbang in order for Starwood’s Board of Directors to fulfill its fiduciary responsibility to shareholders. Starwood’s Board of Directors has not changed its recommendation from the Marriott deal, and Marriott came out with a press release reaffirming its commitment to the Starwood transaction.

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The original deal with Marriott, which you can read about in Lodging Industry Reacts to Airbnb—the Starwood-Marriott Merger, was a complicated deal to begin with, as it was set up as a cash and stock transaction with the spin-off of Starwood’s timeshare business to shareholders. Details of the Anbang deal are still vague, given the uncertainties involved.

The likely process going forward

At this point, Starwood has made the necessary announcements to the markets and has received permission from Marriott to enter into discussions. Starwood’s bankers will flesh out exactly what Anbang’s offer consists of, determine what conditions and unanswered questions remain, and ascertain whether Anbang actually has the money.

Bankers will probably try to enter into a standstill agreement and a nondisclosure agreement that would prevent Anbang from buying Starwood’s stock in order to thwart the deal with Marriott. Given that Starwood is cooperating and entering into discussions, it is likely that Anbang will agree. If Anbang comes back with a binding offer, then the next step will be to announce to the markets that Anbang’s offer is likely to lead to a superior transaction. The Board will then negotiate a definitive agreement with Anbang and announce its change of recommendation to the markets. At that point, the ball will be in Marriott’s court to either increase its bid or walk away.

Other merger arbitrage resources

Other important merger spreads include the merger between Cigna Corporation (CI) and Anthem (ANTM), which is set to close at the end of 2016. For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.

Investors who are interested in trading in the hotel sector can look at the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ).

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