Choice and Wyndham battle it out as antitrust arguments amp up

As the Choice-Wyndham sparring match moves into its eleventh month, more attention is turning to potential antitrust issues involving a potential merger of the two lodging behemoths. In the meantime, as company executives trade salvos, and lawyers amass billable hours, and shareholders are bombarded with missives from both sides, Choice and Wyndham franchisees are playing a waiting game.

As is well documented, Choice has been attempting to absorb Wyndham into its fold since April, 2023. Choice argues that the deal would bring down the cost of operations for franchisees while allowing them to be more competitive against OTAs. Every cash and stock offer has been rebuffed by Wyndham, citing concerns with undervaluation compared with future growth prospects and the risk of uncertain regulatory review. 

As the months have gone on, the back and forth between the two companies has become increasingly fraught, and the takeover attempt became hostile in December. Upping the ante, in January, Choice directly approached 40 percent of Wyndham shareholders and nominated eight people to stand for election to Wyndham’s board. That move will be considered at Wyndham’s annual board meeting this spring.

Of franchisees and the FTC

Choice Hotels International has nearly 7,500 hotels, representing a portfolio of 22 brands. Wyndham franchises about 9,100 hotels, representing 24 brands.  Both companies have the vast majority of their franchises in the United States, and operate mainly within the economy and midscale sectors.

Those are the sectors where most  AAHOA members reside. The Asian American Hotel Operators Association represents about  20,000 hotel owners in the United States.  Significantly, AAHOA members own about 2/3s of all Choice and Wyndham branded hotels in the United States.

According to Laura Lee Blake, CEO of AAHOA, a vast majority of its members are opposed to the deal.  “AAHOA remains highly concerned about the significant impact this proposed merger will have on the industry. In response to a recent survey, our members raised the alarms that a hostile takeover by Choice Hotels will limit competitiveness, dilute the merged brands in this segment, and decrease the value offered to guests.”  The survey also found that 77 per cent of those who own Choice or Wyndham properties thought a deal would hurt their business, causing the costs of doing business to rise. Nearly 70 percent of those respondents added that it is unlikely, or very unlikely, they would consider being a licensee of the merged company if the Choice Hotels takeover occurs.

That said, the question is, if Choice and Wyndham merge, where would the franchise operators go?  Blake points out that a merger would create a midscale/economy hotel behemoth. In the economy section, Choice/Wyndham would represent 58 percent of the market, according to AAHOA, while the combined companies would own 70 percent at the midscale level. Opting out of a combined company’s franchise offerings, therefore, might not be a practical reality, according to Blake.  Aside from the fact that most operators are locked into long-term agreements, those that can get out wouldn’t have many choices. Blake points out that even if a competitive brand exists, it may already be represented in a particular market. And if another flag is available, the cost of conversion could be prohibitive.

Taking Sides

Both AAHOA and Wyndham have loudly voiced concerns that a merger would be anticompetitive. Enter the Federal Trade Commission. The U.S. government agency has a mission to protect consumers by preventing anticompetitive and unfair business practices. In this case, the consumer is not the hotel guest. It’s the hotel owner, who could become more vulnerable because of a loss of competition among companies like Choice and Wyndham that sell franchise services.

The agency has been looking into this matter for some time and in January, it made an expansive second request to each company for detailed data surrounding the competitive landscape and other matters. On a parallel track, the attorneys general of four states (Washington, Vermont, Kansas and Colorado) are also looking into the case.

The focus for AAHOA and Wyndham is the economy and midscale sector of the market. Taking that into account, the argument against the merger is clear, according to AAHOA. “If you take away the top two franchisor options for people who want to run economy and midscale hotels,” says Blake, “you are reducing their options.  And when you take away the top two options, you’re going to make it more expensive for the owners to operate those hotels.”

Wyndham concurs that a merged company would create a market share that is far higher than a 30 percent threshold often cited in FTC matters. On its website, Wyndham states, “Choice’s offer would create the largest U.S. provider of hotel franchise services in the chain scales that serve middle-income guests – economy and midscale – with over 55 percent market share in each, resulting in significant uncertainty as to whether the FTC or courts would ever clear the transaction.”

“Wyndham’s characterization of the lodging industry’s competitive landscape and relevant regulatory risk is incorrect,” says Patrick Pacious, president and CEO of Choice Hotels. The Choice argument is that a characterization of the market based on segmentation of brands by STR1 chain scales is specious. According to an investor presentation filed with the U.S. Securities and Exchange Commission. Choice says “the market” is not solely economy and midscale properties, but rather all  hotels in the United States.

According to the American Hotel & Lodging Association, there are nearly 56,000 hotels in the United States. A combined Choice and Wyndham have a little more than 12,000, about 21 percent of the total hotel property. That is not a number served up in the Choice presentation. However, the presentation does state that a combined Choice-Wyndham would represent only 10 per cent of room revenue. Given that economy and midscale rates are far lower than rates at higher-end hotels, however, that statistic may be somewhat beside the point.

A relevant argument is that even within the economy and midscale sector, according to the presentation, there are plenty of other franchising companies. Furthermore, it points out that Marriott (Studio Res), Hilton (Tru and Spark), and IHG (Garner) are all adding midscale and/or premium economy brands to their portfolios, thereby broadening the competition within the pertinent sectors.

Next up

Many of these matters are coming to a head in the next few months. Choice will present its slate of board nominees during the Wyndham shareholder meeting in the spring. Meantime, attorneys for Wyndham and Choice are shifting through data to present to the FTC. Once the FTC gets the information, its decision as to whether to proceed with antitrust action could take months. And if it does decide to proceed with legal action, the proceeding could stretch into next year.

During Wyndham’s February earnings call, Wyndham CEO Geoff Ballotti expressed concern that this timeline was disrupting new business development while leaving franchisees at bay.  “The potential value destruction that could arise from this ongoing and elongated process remains significant,” said Ballotti. “Choice continues to try to take advantage of the uncertain timeline and outcome to exploit franchisee uncertainty for its own competitive advantage.” He said some deals and ground breaks have been paused, as franchisees want to see the issue resolved before moving forward. At the corporate level, he noted, “we know our record Q4 could have been better, both domestically and internationally without the noise” and that “Choice’s unsolicited offer also has significant real dollar costs for our shareholders, currently estimated at approximately $75 million, which includes approximately $15 million related solely to the FTC review.”