Marriott was eager to get into bed with Starwood. Now some of the excitement has worn off.
The $12 billion hotel megamerger is taking longer to close — thanks to Chinese authorities extending their review — and is turning out to be less enticing than Marriott had envisioned, according to sources.
“There is a notion of remorse,” said one source close to the deal.
Last week, the Chinese Ministry of Commerce said it needed an additional review period that could last as long as 60 days.
The delay raised concerns that the deal was in trouble, especially since Marriott beat China’s Anbang Insurance Group in an all-out bidding war for Starwood.
Just last month, Marriott Chief Executive Arne Sorenson said he was “optimistic” that the deal would close in the coming weeks.
Marriott does not own real estate and plans to sell Starwood’s roughly $2 billion of property. The longer the deal takes, the greater the risk hotel real estate prices fall.
“We know we are in the last stages of the real estate hotel cycle and so the risk for them is they would be left owning real estate for an extended period of time,” said David Katz, managing director at the Telsey Advisory Group.
China’s review is the last regulatory hurdle to the deal.
“The board and management of Marriott International are looking forward to integrating the companies once the approval from China is obtained,” according to a statement from the company.
“Marriott continues to believe that the planned merger transaction poses no anti-competitive issues in China and we are looking forward to closing promptly following Chinese regulatory approval.”
The combination of Marriott, which owns the Ritz-Carlton and Courtyard Residence brands, with Starwood, whose roster includes Sheraton and Westin, will create the world’s biggest hotel operator, surpassing Hilton Hotels.
While it sounds great on paper, there’s growing unease at Marriott about the integration with Starwood. In particular, Marriott execs are concerned about the compatibility of combining Starwood’s loyalty-rewards program with its own, said one source.
Starwood, through brands like W Hotels, has a younger and more global clientele that is used to a more flexible points system than the staid Marriott brand, according to Katz.
“This isn’t exactly what they thought they were buying,” said the source.
Marriott declined to comment on the integration.
Nevertheless, Bill Marriott, who controls the family-founded hotel chain, has expressed confidence in CEO Sorenson, who came up with the idea of buying Starwood, said one source.
Last month, Sorenson embarked on a global tour of Starwood offices weeks earlier than expected so he could push the integration. At the same time, he’s also preparing to eliminate some Starwood executives, which doesn’t make it any easier, said a source.
Given the rough road ahead, Marriott may not shed any tears if China comes down against the deal.
Not gaining Chinese approval “would be a good emergency exit for Marriott if they wanted out of the deal,” Katz said.