Why Marriott And Starwood Shares Deserve To Trade Higher After Merger

• Shares of both Marriott International Inc MAR and Starwood Hotels & Resorts Worldwide Inc HOT are down around 7 percent year-to-date.
• Canaccord Genuity’s Ryan Meliker maintained a Hold rating on Marriott and a Buy rating on Starwood, with price targets of $83 and $93, respectively.
• Marriott has inked an agreement to acquire Starwood and the deal is expected to be accretive relatively quickly, Meliker said.

Marriott and Starwood have entered into an agreement in which the former would acquire the latter. Analyst Ryan Meliker mentioned that according to the agreement, Starwood’s shareholders would receive 0.92 shares of Marriott International, Inc. Class A common stock and $2.00 in cash for each share of Starwood common stock.

Marriott has projected annual cost savings of at least $200 million in the second full year after closing. This would be achieved by leveraging operating and G&A efficiencies. Marriott expects the acquisition to be earnings accretive by the second year after the merger, excluding the impact of transaction and transition costs.

Marriott has indicated that Starwood is likely to continue its capital recycling program, which is expected to generate $1.5-$2.0 billion in after-tax proceeds from the sale of owned hotels over the next two years. The hotels are expected to be sold subject to long-term operating agreements.

The combined entity would be able to realize “increased efficiency by leveraging economies of scale in areas such as reservations, procurement and shared services,” Meliker said. Revenue growth would be boosted by additional customer loyalty due to the combined sales expertise and increased account coverage of the combined company.

“We expect these enhanced efficiencies and revenue opportunities should drive improved property level profitability as well as greater owner and franchisee preference for the combined company's brands,” Meliker wrote.