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Fitch: Starwood merger termination would temper Marriott's ratings momentum

Mar 15, 2016

NEW YORK, NY - Fitch Ratings would likely revise its Rating Outlook for Marriott International to Stable from Positive if Starwood Hotels & Resorts, Inc. terminates its merger agreement with the company to pursue a competing, higher bid from an investor consortium. Fitch could also revise Marriott's Outlook to Stable from Positive if the company deviates from its previously disclosed all-stock transaction funding strategy and uses debt to increase its offer for Starwood.

Fitch is unaware of any plans by Marriott to modify its offer and/or funding strategy. However, Marriott has put forth a credible argument for the combination since announcing the deal last fall, and Fitch believes the company may feel compelled to raise its offer to keep the deal from falling apart. Key strategic benefits include Fitch-estimated cost savings of roughly $200 million, primarily from eliminating duplicative functions and increased scale to bolster the company's competitive position in the context of select distribution channel (i.e. on-line travel agencies) consolidation and emerging threats from short-term accommodation rental websites, such as Airbnb, Inc.

Fitch affirmed its 'BBB' long-term Issuer Default Rating (IDR) and 'F2' short-term IDR for Marriott and revised the company's Rating Outlook to Positive from Stable on Nov. 16, 2015, following the company's Starwood acquisition announcement. Fitch believes Marriott's credit profile will be more consistent with a 'BBB+' IDR after combining with Starwood, notwithstanding its unchanged financial policy that includes managing adjusted leverage at its stated 3.0x to 3.25x target.

Fitch expects the acquisition to lower Marriott's business risk profile and improve profitability, which should enhance the company's ability to navigate future lodging cycle downturns. The combined company will have the largest high-quality, internationally recognized brand portfolio in the industry (30 brands). Acquiring Starwood will also enhance Marriott's position in advanced emerging markets.

On March 11, 2016 Starwood notified Marriott that it had received an unsolicited, highly conditional and non-binding indication of interest in purchasing Starwood from an investor consortium led by Chinese insurer Anbang Insurance Group. Starwood is obligated to pay Marriott a $400 million termination fee if it accepts a competing offer or withdraws its recommendation to its shareholders to vote in favor of the Marriott merger. Starwood has indicated that its board of directors has not changed its recommendation in support of Starwood's merger with Marriott.

Fitch: Starwood merger termination would temper Marriott's ratings momentum

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