Marriott (MAR) Ratings Affirmed by Moody's Amid Revised Starwood Offer
Moody's Investors Service affirmed Marriott International, Inc.'s (Nasdaq: MAR) Baa2 senior unsecured rating and Prime-2 commercial paper rating following the announcement that it has revised its terms to acquire Starwood Hotels & Resorts Worldwide Inc. (after the spin-off of the timeshare business Vistana Signature Experiences, Inc.) in a transaction valued at approximately $14.5 billion including the assumption of Starwood debt net of cash. Moody's estimates this represents about a 14.4 times 2015 EBITDA multiple pro forma for the spin-off of Vistana. Starwood shareholders will receive .80 shares of Marriott stock in exchange for each Starwood share and a $21 per share special dividend in cash. The transaction value includes Marriott's assumption of $1.8 billion of Starwood debt and $900 million of Starwood cash. Moody's expects Marriott to take steps to ensure that the existing Starwood debt will rank pari passu with the Marriott debt in the capital structure. The rating outlook remains stable.
The following ratings are affirmed:
Marriott International, Inc.
Senior unsecured notes at Baa2
Commercial Paper rating at Prime-2
Senior unsecured shelf at (P)Baa2
Marriott RHG Acquisition B.V.
Backed Commercial Paper rating at Prime-2
Outlook will remain stable
RATINGS RATIONALE
The affirmation acknowledges that while Marriott's debt will notably increase, Marriott will be able to maintain RCF to net debt above 18% (Moody's stated downward rating trigger). Moody's estimates pro forma for the revised purchase terms and for the Vistana spin-off, Marriott's 2015 RCF to net debt would be about 18.5%. In addition, the affirmation reflects that Marriott will be able to bring its debt to EBITDA back within its stated leverage target of 3.0x to 3.25x within the next twelve to eighteen months. Marriott remains committed to its leverage target and Moody's believes that Marriott will take the steps necessary including reducing the level of share repurchases and making asset sales during 2016 in order to bring its leverage back within the stated target quickly. Moody's estimates pro forma for the acquisition of Starwood (excluding Vistana) for the twelve months ended December 31, 2015, Marriott's debt to EBITDA would be 3.9x -- a full turn higher than its current debt to EBITDA of 2.9x. EBITA to interest expense pro forma for a full year of interest expense would be 4.7x (versus 7.2x currently).
The affirmation also acknowledges that the combined entities would be the largest hotel company worldwide with more than 1.1 million rooms in its hotel system compared to Hilton with more than 758,502 rooms and InterContinental Hotels Group with about 744,368 rooms. It will increase the Marriott brand portfolio to 30 brands and add to the Marriott brand portfolio several strong brands including Westin, W, and St. Regis, amongst others. The transaction will also increase Marriott's geographic diversity by reducing its reliance on North America to 68% from 77% currently and strengthening its penetration in Asia Pacific to 14% from 8%. The acquisition will combine the Marriott Rewards program with about 54 million members with the Starwood Preferred Guest program with about 21 million members.
However, we anticipate that the acquisition of Starwood will cause Marriott's operating margins to weaken and will increase its exposure to lodging down cycles. Only about 12% of Starwood's net revenues are from base management fees and Starwood currently has lower operating margins at 35% (due its higher level of owned/leased hotels) than Marriott. Marriott and Starwood are committed to making $2 billion in asset sales which will be converted to management/franchise agreements. This will bolster its operating margins going forward. In addition, over time we expect Marriott to transition Starwood towards its business model which includes a higher level of base management fees. In addition, after the acquisition, Sheraton will be the second largest brand behind the Marriott brand representing about 14% of Marriott's pro forma hotel system. Moody's views the Sheraton brand as being more weakly positioned than the Marriott brand.
"The revised offer will result in weaker initial credit metrics however, we believe Marriott will be able to quickly bring its leverage back in line with its balance sheet target," stated Maggie Taylor, Senior Vice President at Moody's.
Marriott's Baa2 rating reflects its large scale, well recognized brands, and good diversification. Pro forma for its pending acquisition of Starwood, Marriott will be the world's largest hotel company with over 1.1 million rooms and 30 brands worldwide. The rating also reflects the company's high level of franchised and managed rooms which results in a relatively more stable earnings stream and lower capital investment relative to those peers that own and lease the hotels they operate. The rating acknowledges Marriott's stable financial policy including a 3.0x to 3.25x debt to EBITDA target (including the present value of operating leases). The ratings incorporate our expectation that Marriott will - as it has in the past - curtail share repurchase activity in favor of debt reduction during periods of earnings volatility. The rating also acknowledges that Marriott's currently strong RCF to net debt will weaken following the acquisition of Starwood. Ratings also reflect the company's sensitivity to economic cycles, and the existence of contingent liabilities.
The stable rating outlook acknowledges that Moody's expects Marriott to bring its debt to EBITDA within it stated 3.0x to 3.25x leverage target by the end of fiscal 2016. It also reflects that Moody's believes Marriott will curtail share repurchases if needed to keep its debt levels in line with its earnings.
Ratings could be downgraded if retained cash flow to net debt approaches 18% or if Marriott's financial policy becomes more aggressive. Ratings could be upgraded if operating performance remains strong and Marriott adopts more conservative leverage targets such that retained cash flow to adjusted net debt would remain above 25%.