Are Big Changes Ahead for Starwood?

Starwood Hotels & Resorts Worldwide Inc.'s decision to explore strategic alternatives to maximize shareholder value was a wake-up call for the hotel sector.
Gregory LaBerge, Marcus & Millichap

Gregory LaBerge, Marcus & Millichap

By Keith Loria, Contributing Editor

Starwood Hotels & Resorts Worldwide Inc.’s decision to explore strategic alternatives to maximize shareholder value was a wake-up call for the hotel sector. Announced during its Wednesday earnings call, the news led industry analysts to believe that all options are under consideration, including a possible sale or the potential for some sort of merger.

“No option is off the table,” Bruce Duncan, Starwood’s chairman, said on the call.

“Starwood’s announcement means that the firm is acknowledging that is underperforming other large-cap hotel companies, most notably Hilton and Marriott,” Gregory LaBerge, Marcus & Millichap’s vice president & national director for the National Hospitality Group, told Commercial Property Executive. “Whatever initiatives Starwood has undertaken to improve performance have not delivered their intended results.”

The Starwood announcement is also a recognition that the hotel industry’s upswing is getting quite mature.

“They’re shrewd enough to recognize that, with equity and debt still pouring into the sector, now is the time to make a move, whether that is selling off entire brands, portfolios or disposing of individual assets,” LaBerge said. “Hotel companies and investors may see an opportunity to create value in some of Starwood’s properties, and would be willing to pay for potential upsides. That’s where we are in the cycle.”

Starwood, which controls the St. Regis, Westin, Sheraton and W Hotels brands, unexpectedly replaced its chief executive a few months back and announced a spinoff of its time-share business. How this latest announcement affects the rest of the hotel sector is anyone’s guess right now, as it will all depend on what direction these “strategic alternatives” go in.

“Certainly, from a sale standpoint, there are plenty of investors that would be interested in their properties. But bear in mind that most of Starwood’s properties are in the luxury and upscale tiers, where the pool of potential investors is relatively small and deals often require a long time to complete,” LaBerge said. “There is a much larger universe of prospective buyers for upscale hotels, where Starwood has more than 160 assets under the aloft, element and Four Points by Sheraton flags.”

Industry vets believe a merger with another hotel company, or an acquisition by private-equity players, is certainly an option for Starwood, although a potential acquirer would have to determine how well Starwood’s culture and brands would fit in. And, most important, the deal would have to be accretive.

“Generally, we’re at a point in the hotel industry cycle where more mergers and entity- or brand-level acquisitions could happen, given the large amount of debt and equity in the sector and all the attention the industry’s superior performance has elicited,” LaBerge said.

The hotelier has hired Lazard to advise it on a potential sale or other strategic alternatives.

“Our board has always been focused on maximizing long-term shareholder value, and this is a time of enormous opportunity and change in our industry,” Duncan said in a company statement. “No option is off the table, and we will take the time we need to thoroughly evaluate our opportunities and achieve the best result for our shareholders, business partners and associates.”