Starwood Holders Will Share Time With ILG In Reverse Morris Trust Spin Of Vistana

It looks a bidding war has emerged for Starwood Hotels (HOT), with three Chinese players and Hyatt Hotels (H) all chasing the well respected hospitality brand. Kudos to those i-bankers for drumming up the interest, especially given the fact that the Chinese government rarely lets its corporate citizens get into bidding wars. While M&A is always exciting to follow, buried amidst the deal headlines was a big announcement regarding Starwood’s timeshare business, Vistana. Earlier this year the company announced that it would spin off Vistana to shareholders, but it seems as though the plan has now been changed.

The company will still be spun off, but it will now occur as part of a ‘Reverse Morris Trust‘ transaction where it will immediately merge with a subsidiary of the Interval Leisure Group (IILG) post-spin. The deal values Vistana at ~$1.5b and Starwood shareholders are expected to own 55% of the combined entity with ILG shareholders controlling the remaining 45%. Despite the ownership differential, ILG will retain control the board of directors with a dominating 9 to 4 majority and its current leadership team will run the combined company. ILG’s Chairman and CEO Craig M. Nash will maintain those titles for the combined entity and Vistana’s execs will continue running Vistana.

ILG is in the vacation ownership business with the Hyatt Residence brand and it also runs an exchange and rental business and services business which bring in a steady flow of income. The press release announcing the transaction was full of joyous execs and here is how it explains the expected benefits of the combination:

  • A Leading Vacation Ownership Company with Complementary Product Offerings: As a leader in the vacation ownership industry, the combined company will have a balanced portfolio of high-end high quality brands. In the exchange and rental business this includes Interval International which provides memberships to nearly two million consumer families and offers vacation exchange through its network of 2,900 resorts in 80 countries. The vacation ownership business will include the Sheraton Vacation Club, Westin Vacation Club and Hyatt Residence Club brands, as well as the largest independent management portfolio of resorts in this space.
  • Improved Financial Strength and Flexibility: The combined company will have a strong balance sheet with substantial debt capacity to support future growth opportunities, both organically and through potential acquisitions. Following completion of the transaction, the combined company is expected to have approximately 1.5x net debt to Adjusted EBITDA, excluding securitizations, and a significant portfolio of receivables available for securitizations to fund growth initiatives.
  • Significant Cost Savings and Revenue Synergies: The transaction is expected to provide the opportunity for meaningful cost savings and revenue synergies, which are estimated to reach approximately $21 million three years from the closing of the transaction, and approximately $26 million five years from closing. These synergies are expected to result from ILG’s global corporate infrastructure, improved utilization of Vistana inventory through existing ILG channels and increased penetration of membership programs to Vistana customers. The companies expect cost savings will result primarily from efficiencies, rent consolidation and natural attrition.
  • Enhanced Membership and Exchange Growth Opportunities: The combined company’s enhanced growth profile is expected to be supported by ILG’s membership and exchange business’ proven stability through business cycles. Vistana has 22 properties in top vacation destinations, and more than 220,000 owners, a vast majority of whom are currently members of Interval International. The combination secures Vistana’s high-demand inventory in the Interval International resort network, strengthening member retention and encouraging additional transactions. Vistana’s robust sales and marketing distribution capability will provide the combined company with a strong platform for fee-forservice, capital-light sales that would drive enhanced returns.

The deal represents a massive pick up for ILG which will take over one of three largest players in the vacation ownership space. Vistana will sign a long term (80 year) global license agreement for key brands such as Westin and Sheraton in exchange for $30m and 2% of the vacation ownership interest sales. The deal is expected to close in Q2 2016, but will require approval from ILG shareholders. Considering shareholders owning 31% of the shares have already committed to backing the deal, that shouldn’t represent much of a hurdle though.

Vistana’s sale also means that management clearly felt that the parent company was a more attractive asset to potential buyers without the timeshare business. That seemed to be the case from the start though as shortly after announcing the spin, Starwood ousted its CEO and subsequently announced that it was hiring advisors to explore its strategic options. Starwood has a small footprint compared to many of its peers, but it has a number of highly regarded brand names such as the W, St. Regis and Westin which would be attractive assets for many buyers. Additionally, large players could take advantage of numerous economies of scale by adding HOT to their portfolio.

Many are dismissing the Chinese interest as merely a way to drive up the deal price. The argument is that a Chinese deal would possibly bring US regulatory issues and that Starwood has a strong presence in China which is currently an oversupplied market. The WSJ doesn’t necessarily agree though and thinks it would be a mistake to not take them seriously. Analysts are also skeptical of Hyatt’s pursuit given that it isn’t a great strategic fit considering its size and locations. Gary Leff from View From The Wing, seems to agree with that sentiment.  Maybe the ultimate end game is to bring in one of the big players such as Wyndham, IHG or Marriott, but the price is only going up as the Starwood’s stock price seems to jump on every new rumored entrant. Starwood’s CEO Adam Aron is convinced something will happen within the next 60 days so this should be fun to watch.

Disclosure: Author has no position in any stock mentioned.


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