Marriott More Attractive With Starwood

December 4, 2015 by Jon C. Ogg

If there was one well-telegraphed potential buyout, it was the sale of Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT). It turns out that Marriott International Inc. (NASDAQ: MAR) was the winner here, and the acquisition may make Marriott just that much more attractive.

In the daily research reports, Canaccord Genuity’s Ryan Meliker upgraded Marriott shares to Buy from Hold, raising his price target up to $88 from $83 in the call. Meliker also said that he was maintaining his Buy rating on Starwood, but the post-deal terms caused him to lower his target price to $81 from $93.

Marriott’s upgrade is based on the strength of its planned acquisition of Starwood. On Starwood, Meliker said:

At today’s valuations, we estimate Marriott is acquiring Satrwood’s [sic] hotel business in a mostly stock transaction for 10.1x 2016E EBITDA (8.7x including cost synergies) versus Marriott’s current multiple of 11.6x. As such, we believe the deal is highly accretive and estimate it will add at least $5.00 per share in value to Marriott in the near-term and at least $8.00 per share once all synergies are realized. This short-term accretion coupled with what we believe will be several longer-term benefits of the merger lead us to upgrade Marriott from Hold to Buy and raise our year-end 2016 price target by $5 to $88.

What stands out here is that the Canaccord Genuity report signals that the fears surrounding a deteriorating macro environment that have led the stock down over 10% over the past month may simply be overdone. The firm remains confident that the United States is not entering a recession in the near term. Meliker even sees upside to current RevPAR expectations, which he believes are at the low-end of Marriott’s 4% to 6% guidance range for 2016.

By lowering the Starwood target, the report is not being negative. It is simply the economics of the merger and what the stock can ultimately fetch. Meliker said:

While the all-in valuation of $79.88 at the point of the Marriott announcement was modestly disappointing relative to our expectations, we do see substantial long-term benefits for Starwood shareholders being part owners of the largest company in the lodging space. We believe the short-term accretion of the Starwood acquisition, coupled with the long-term benefits of transforming Marriott into the dominant lodging company lend well to Marriott’s stock price going forward.

Canaccord Genuity’s belief is that Starwood shares will be worth $81.00 at an assumed mid-2016 closing of both transactions.

Marriott shares were last seen up 2.3% at $70.39, versus a consensus analyst price target of $83.28 and a 52-week trading range of $63.95 to $85.00. Starwood shares were up 1.9% at $70.34, with a consensus price target of $84.53 and a 52-week 63.99 to $87.99.