Marriott's Unsecured Notes to Gross $1.5B

But now, as it wraps up its regulatory review, Marriott must be wishing more than ever that its first bid had gone through unmolested.

Earlier this month Marriott announced it was hitting the debt market, presumably to satisfy the cash component of the last and final offer it made for Starwood. It is issuing two tranches of senior unsecured notes that it expects to gross $1.5 billion.

Even before the turmoil unleashed by Brexit, the final bid with its cash component posed greater risk for the hotel management company than its first bid, according to Fitch Ratings, which assigned a 'BBB' rating to the notes.

As Fitch said when it announced its ratings of the notes:

Increasing the cash component is a riskier strategy, particularly in the context of an extended lodging cycle where revenue growth is slowing and supply is accelerating. Marriott will need to execute on asset sales and pull back on share repurchases to return leverage to within its policy target range by the end of this year.

Fitch also noted that volatile capital markets (and remember this was written at the beginning of June) :

...could make selling Starwood's roughly $2.3 billion owned-hotel portfolio more challenging, although Fitch believes the high-quality portfolio of assets will generate strong institutional investor interest. Marriott could also face pressure from equity investors to sustain a higher level of share repurchases and delay deleveraging during the year, depending on how its shares perform.

On the positive side, Fitch noted that Marriott increased its merger-related cost savings synergies target to $250 million from $200 million with announcing its revised Starwood merger offer “and gave more attention to potential revenue synergies through enhanced RevPAR penetration for Starwood brands and new unit growth, although it has not included revenue synergies in its guidance.”

Same Fundamentals, Different Valuation

The deal still has the same fundamentals that made it so attractive to Marriott, Marc A. Magazine, executive managing director of Savills Studley's Hospitality Group, told GlobeSt.com. The problem is, of course, that valuations will remain in flux until some certainty is introduced into the situation.

By valuations, Magazine means the European properties. It has become widely assumed in the space of a few days that Brexit will bring good tidings to the US commercial real estate markets because 1) foreign investors will be seeking a safe haven in the US property markets, thus driving up pricing 2) the Federal Reserve will be less likely to raise interest rates making financing still as cheap as ever and 3) the 10-year Treasury will remain at its bottom-bouncing level.

The analysis by the EC suggests that the combined company will not have a significant concentration of assets in the UK. This actually would have been a good thing if it had because the way the British Sterling is plummeting a vacation in Britain is looking very inexpensive.

Rather, it is in Barcelona, Milan, Venice, Vienna and Warsaw where the combined market presence of Marriott and Starwood will be the strongest.

Unfortunately, Spain and Italy are two of the countries that experts say are more inclined to follow the UK into holding their own referendum on EU membership.

This is, in short, a story that will not be ending any time soon -- not for Marriott and not for the industry or the global economy.

BETHESDA, MD-Despite the chaos caused by the UK's decision to exit the EU last week -- chaos that is still ongoing -- the European Commission announced on Monday that it has cleared the acquisition of Starwood Hotels & Resorts by Marriott International. The takeover, the EC found, would not adversely affect competition in Europe. US and Canadian antitrust regulators have also green-lighted the acquisition.

It is a hugely ambitious acquisition. Marriott has said it will create the biggest hotel company in the world, with the combined organization operating or franchising more than 5,500 hotels with 1.1 million keys worldwide.

It was also a hard won deal for Marriott, which first made an offer for the portfolio in November of 2015. The bid valued Starwood Hotels at $12.2 billion, an offer that the company promptly accepted. Several months later, though, Marriott found itself fending off a determined counter bidder -- a consortium led by Anbang Insurance Group Co. Ltd., which made two offers for the portfolio, one of which Starwood accepted before Marriott sweetened its offer to rest at $13.6 billion.

Marriott's new offer also included a $3.6 billion cash component, compared to the negligible amount in the first offer. By April of this year the battle was over -- shareholders had approved the deal.

Marriott's Unsecured Notes to Gross $1.5B

But now, as it wraps up its regulatory review, Marriott must be wishing more than ever that its first bid had gone through unmolested.

Earlier this month Marriott announced it was hitting the debt market, presumably to satisfy the cash component of the last and final offer it made for Starwood. It is issuing two tranches of senior unsecured notes that it expects to gross $1.5 billion.

Even before the turmoil unleashed by Brexit, the final bid with its cash component posed greater risk for the hotel management company than its first bid, according to Fitch Ratings, which assigned a 'BBB' rating to the notes.

As Fitch said when it announced its ratings of the notes:

Increasing the cash component is a riskier strategy, particularly in the context of an extended lodging cycle where revenue growth is slowing and supply is accelerating. Marriott will need to execute on asset sales and pull back on share repurchases to return leverage to within its policy target range by the end of this year.

Fitch also noted that volatile capital markets (and remember this was written at the beginning of June) :

...could make selling Starwood's roughly $2.3 billion owned-hotel portfolio more challenging, although Fitch believes the high-quality portfolio of assets will generate strong institutional investor interest. Marriott could also face pressure from equity investors to sustain a higher level of share repurchases and delay deleveraging during the year, depending on how its shares perform.

On the positive side, Fitch noted that Marriott increased its merger-related cost savings synergies target to $250 million from $200 million with announcing its revised Starwood merger offer “and gave more attention to potential revenue synergies through enhanced RevPAR penetration for Starwood brands and new unit growth, although it has not included revenue synergies in its guidance.”