Starwood Hotels & Resorts Worldwide Inc. said it is exploring strategic alternatives, sparking speculation about a possible sale—and the potential for broader merger activity in the hotel industry.

Starwood, which controls the St. Regis, Westin, Sheraton and W Hotels brands, on Wednesday said its board has decided to “explore a full range of strategic and financial alternatives to increase shareholder value,” retaining investment bank Lazard to assist with the process.

“No option is off the table,” Starwood chairman Bruce Duncan said Wednesday on a conference call with analysts.

Investors read the statement as Starwood being open to a takeover offer, although the strategic review could also result in a sale or spin-off of any of the two dozen hotels that Starwood will own after its previously announced spinoff of its vacation ownership business. The review could also result in an acquisition of another company or brand, say people close to Starwood.

Speculation about Starwood’s future has swirled since February, when chief executiveFrits van Paasschen resigned amid concerns over the company’s slow growth. DirectorAdam Aron has been interim CEO while the company searches for a successor.

Historically, Starwood has been a strong performer in the high-end hotel market. The company has expanded overseas faster than its rivals; roughly half of its more than 350,000 rooms are outside the U.S. Its W brand is known for having a stylish, modern edge. Starwood also has been ahead of the curve in testing smartphones as room keys at select hotels.

That said, the Stamford, Conn., company has only half the number of rooms of Marriott International Inc. or Hilton Worldwide Holdings Inc. And Starwood has struggled to make its mark in the limited-service hotel sector, where its rivals’ mid-market brands such as Courtyard by Marriott and Hilton Garden Inn have helped power earnings and drive growth.

Meanwhile, its Sheraton brand, which accounts for more than 40% of Starwood’s room total, has lost ground to peers.

Mr. Aron on Wednesday said Starwood would soon unveil a plan to reinvigorate the Sheraton brand. “It took some time for the Sheraton brand to get in its current state and it will take some time to improve,” Mr. Aron said on the analyst call.

On Wednesday Starwood said first-quarter profit fell to $99 million, or 58 cents a share, from $137 million, or 71 cents, a year earlier. Revenue slipped 2.9% to $1.4 billion.

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“Starwood’s inability to sell hotel owners on its select service brands forced it to put its hand up for help” via a merger or acquisition, said Chad Beynon, a lodging analyst at Macquarie Securities Group. “The most likely outcome is sale of company,” he said.

By contrast, Hilton on Wednesday beat analyst expectations on earnings and boosted its 2015 guidance, while Marriott said first-quarter earnings rose 20% as it continues to ramp-up growth overseas.

The uncertainty surrounding Starwood as it decides on new leadership has sparked interest among a number of hedge funds and activist investors. Starwood and its advisers have spoken in recent weeks to some of them, including Senator Investment Group LP and Fir Tree Inc., which have urged the company to take steps to boost its stock price, according to people familiar with the matter.

Senator owned 1.3% of Starwood as of Dec. 31, public filings show. In March, it sought regulatory approval for its stake, suggesting it plans to buy more or to convert options into shares. Fir Tree didn’t own shares as of year-end, and it isn’t clear whether it has since bought a stake.

Starwood shares, which had risen about 5% over the previous 12 months, jumped 8.3% to $87.53 in Wednesday trading.

Aside from InterContinental Hotels Group PLC’s recent $430 million acquisition of boutique hotel operator Kimpton Hotels & Restaurants, the lodging sector hasn’t had a significant merger since the 1990s. The sector is ripe for consolidation, said Thomas Allen, a Morgan Stanley analyst.

The industry, which still includes thousands of independent hotel operators, is highly fragmented, with the five largest companies by rooms controlling about 22% of the hotel rooms globally.

Large global hotel operators combining would have significant cost savings and could boost revenue through cross-selling brands, larger distribution networks and bigger rewards programs, Mr. Allen said.

The recent rise in hotel share prices would make takeovers expensive, industry observers note.

Hotels are still enjoying an expansion in revenue per available room—“revpar” in the industry lingo—that began in 2010. With little new supply being added in most markets, occupancy in the U.S. hit an all-time high in March at 65% and daily rates also scored a record at $116, according to industry tracker STR Inc. That combination produced record revpar of $75 in March, up 8.5% from a year ago.

Starwood also continues to look for a new CEO. Mr. Duncan said a search process of internal and external candidates is proceeding in a timely manner. But he acknowledged on Wednesday that with Starwood’s future now unclear because it is reviewing strategic alternatives, some CEO candidates might no longer be interested.

“Certainly, there are people you won’t be able to attract,” he said. “Given what’s going on.”

Mr. Aron, whom several Starwood investors said wants the CEO job himself, also pledged cost-cutting. That included canceling the lease for a Gulfstream IV private jet used by company executives. In an interview, Mr. Aron said the cost savings of executives flying commercial airlines would be in the seven figures.

Source: http://www.wsj.com/articles/starwood-hotels-to-explore-strategic-alternatives-to-increase-shareholder-1430305988