It seems fitting that Marriott’s upcoming acquisition of Starwood Hotels & Resorts (creating one of the largest hotel companies in the world) is anticipated to occur during the prime summer vacation season. The combined company will be comprised of more than 5,500 hotels and 30 brands. By way of comparison, Hilton is comprised of over 4,600 hotels and 13 brands and International Hotels Group is comprised of over 5,000 hotels and 10 brands.
So, what does this merger mean to the commercial real estate lender? How will it affect future hotel financing transactions? At the most basic level, there will be fewer families of brands for owners to choose from, but it appears that a large number of brands within the merged company will continue (with certain overlapping flags likely being phased out). Starwood-Marriott loyalty members will have a wider variety of hotels to frequent in their network in any given location, which may not be welcome news to individual hotel owners.
At the recent NYU International Hospitality Industry Investment Conference, I heard panel after panel discus the importance of brands and the idea that “bigger is better” in the hotel brand context. The bigger brands have the benefit of strong loyalty programs (Marriott and Starwood each have 54 million and 21 million members, respectively!) steering their loyal members to a broader range of hotels in more locations. Additionally, bigger brands are in a much stronger position to negotiate with online travel agents (OTAs) and fend off concerns of the growing popularity of Airbnb and similar on demand lodging options.
However, not all hotel pros are excited about such growth. The majority of hotels with the “big brand” names are not actually owned by such brands but are owned independently and the individual owners enter into licensing agreements with the hotel brands through franchise or management agreements to use the brand’s name and become part of the brand’s hotel system. Certain franchise and management agreements contain areas of protections in which the hotel brand agrees not to franchise or operate competing hotels in the same area as an existing hotel. Usually the restrictions on the hotel brand will carve-out large scale corporate acquisitions so these restrictions may not in fact offer much protection to individual hotel owners in connection with the Starwood-Marriott merger. Owners have already started to challenge this; at least one lawsuit has been brought against Starwood by the owners of Sheraton Grand Chicago and Westin Times Square. The suit alleged that the Marriott-Starwood merger would breach the existing hotel management agreements which restricted Starwood from owning, franchising, managing or operating any other hotels within a certain specified area of Chicago and New York City. The plaintiffs sought an injunction to the merger, claiming that they would be irreparably harmed by such merger, since Marriott already operates hotels within the areas of protection for such hotels. The court disagreed, saying that even though there may be a breach of contract, the owners waited nearly six months after the announcement of the merger to bring the injunction action, which was too long, and that the dispute could be remedied by money damages as opposed to equitable relief. It will be interesting to see whether any other similar claims are brought; however, many of the franchise and management documents mandate arbitration or other non-judicial resolution, so such disputes may not be litigated publicly.
So as I asked before, what does all of this mean for future hotel financings? The lawyer in me is curious as to whether the terms of new franchise and management agreements for brands that were originally owned by Starwood will morph into the forms that are used for Marriott brands. Will all future comfort letters be on Marriott’s form? What about replacement comfort letters for the Starwood brands? The potential synergies of streamlining these forms could be extremely beneficial and reduce transaction expenses but also raise the concern that an owner’s (and lender’s) leverage to negotiate with the big brands will be reduced if they have fewer alternatives.
As throngs of vacationers check-in to Starwood and Marriott hotels this summer, these questions will be far from their minds, but they will be waiting for us once vacations are over and the merger is complete.