What a Choice-Wyndham tie-up might mean for hotel investors

Choice Hotels has launched a public bid to buy Wyndham Hotels & Resorts after Wyndham decided to disengage from further discussions with Choice, following almost six months of talks.

Choice has proposed to acquire all the outstanding shares of Wyndham Hotels & Resorts at a price of $90.00 per share, payable in a mix of cash and stock. Under Choice's proposal, the $90.00 per share to be received by Wyndham shareholders would consist of $49.50 in cash and 0.324 shares of Choice common stock for each Wyndham share they own.

Choice's proposal represents a 26 per cent premium to Wyndham's 30-day volume-weighted average closing price ending on October 16, 2023, an 11 per cent premium to Wyndham's 52-week high, and a 30 per cent premium to Wyndham's latest closing price.

The proposal implies a total equity value for Wyndham of approximately $7.8 billion on a fully diluted basis. With the assumption of Wyndham's net debt, the proposed transaction is valued at around $9.8 billion.

In April 2023, Choice sent its initial letter to Wyndham regarding a potential transaction, proposing to acquire Wyndham for $80.00 per share, comprising 40% cash and 60% Choice stock. The proposal was later upped to $85.00 per share and then to $90.00, with all proposals turned down by Wyndham, which has now walked away from discussions.

What it means

Like so many other hotel brands Wyndham is an asset-light business these days and styles itself as the “world's largest hotel franchising company”.

All this means is that it is reliant on independent owners for its real estate. So how would a merger impact them?

In a note to investors analysts at Truist Securities said that Choice's management had explained a couple of reasons why the deal would be beneficial to franchisees: 

  1. It could offer opportunities to improve revpar;
  2. It could potentially decrease in the cost of ownership
  3. It could add more value via an enlarged loyalty programme.

Another point to note: even if a deal does get done — and who knows if Choice will be the only suitors? — it faces regulatory approval, which may not be straightforward given the heavy concentration in the economy and midscale segment in the US of both brands.

What they said

Patrick Pacious, president & CEO of Choice Hotels said: “While we would have preferred to continue discussions with Wyndham in private, following their unwillingness to proceed, we feel there is too much value for both companies' franchisees, shareholders, associates, and guests to not continue pursuing this transaction.

"We are confident that this combination would significantly accelerate both Choice's and Wyndham's long-term organic growth strategy. For franchisees, the transaction would bring Choice's proven franchisee success system to a broader set of owners, enabling them to benefit from Choice's world-class reservation platform and proprietary technology to drive cost savings and greater investment returns.”

Stephen Holmes, chairman of the Wyndham board commented: "Choice's offer is underwhelming, highly conditional, and subject to significant business, regulatory and execution risk. While our board would support a value-maximizing transaction, given the substantial, unmitigated embedded risks and value destruction potential presented by the proposed transaction, we determined it is not in the best interests of Wyndham shareholders.  We have engaged with Choice and its advisors on multiple occasions to explore these risks. 

"However, it became clear the proposed transaction likely would take more than a year to even determine if, and on what terms it could clear antitrust review, and Choice was unable to address these long-term risks to Wyndham's business and shareholders.

"We are disappointed that Choice's description of our engagement disingenuously suggests that we were in alignment on core terms and omits to describe the true reasons we have consistently questioned the merits of this combination – Choice's inability and unwillingness to address our significant concerns about regulatory and execution risk and our deep concerns about the value of their stock."