There has been a lot of buzz about Choice International’s offer to buy Wyndham Hotels & Resorts, which, in turn, has generated some uncertainty and confusion. Choice keeps pushing its position publicly but is not in current negotiations with Wyndham. Through PR, interviews and public filings, it is trying to push Wyndham to a deal. The following is intended to address many of the commonly asked questions. All information is based on publicly available sources and nothing discussed should be taken as a recommendation to buy or sell any stock nor to enter into any agreements.
The Background
Prior to the offer being made public, Wyndham had an enterprise value (equity plus debt) of $8.4 billion and Choice had an enterprise value of $7.50 billion. Wyndham traded at a 2023 enterprise value to EBITDA multiple of 12.1x and Choice traded at an enterprise value to EBITDA multiple of 14.0x. This means that the market valued Wyndham at 12.1 times every dollar of EBITDA (which is earnings before interest, taxes, depreciation and amortization) and Choice was valued at 14.0 times every dollar of EBITDA. Wyndham had total net debt (debt less unrestricted cash) of $2 billion and Debt/2023 EBITDA of 3.0x, which means for each dollar of EBITDA, Wyndham had $3.00 dollars of debt. Choice had total net debt (debt less unrestricted cash) of $1.35 billion and Debt/EBITDA of 2.5x, which means that for each dollar of EBITDA, Choice had $2.50 of debt.
In evaluating the deal landscape, it is important to understand that Wyndham is not broken. It is not mismanaged; quite the contrary, it has a strong, highly experienced management team that has performed very well for stockholders and for franchisees and is generating substantial cash flow.
Choice’s OfferÂ
On October 17, 2023, Choice offered to acquire all shares of Wyndham for $90 per share, comprised of $49.50 per share in cash and the remainder in Choice common stock. This offer was made publicly despite Wyndham not being engaged in discussions with Choice at the time.
Wyndham’s Disapproval
The deal structure has several major flaws from Wyndham’s perspective. A significant portion of the deal price is in Choice common stock. This stock fluctuates daily based on the stock market so there is no protection for Wyndham shareholders that what they offer is what will be received at the closing of a transaction. In fact, on October 16, Choice’s common share price was $124.90. After the public offer on October 17, Choice’s stock price closed at $116.37, a decline of $8.53 per share or almost 7%. It further declined to a closing price of $111.39 as of November 13, a decline of $13.51 or almost 11%. This indicates that the market overall doesn’t like Choice making this potential investment, but it also highlights the riskiness of a deal with billions of dollars of consideration paid in cash.
A transaction could significantly slow down Wyndham’s re-licensing of properties and the signing of new franchise agreements as owners and developers would be unsure of whether they would have a future with Wyndham and what changes Choice might impose on them. The closing period could be unusually long due to necessary regulatory approvals.
Why a Deal is Good for Choice
Choice would have greater control of the upper-midscale, midscale and economy market segments and would benefit from Wyndham’s high-growth rates and pipelines. Choice would also benefit from a broader base with operating and expense synergies.
Why Doesn’t Wyndham Buy Choice Instead?
Choice had been trading at an enterprise value to EBITDA multiple 1.9x higher than Wyndham (14.0x versus 12.1x in 2023). As a result, Choice intends to use its stock, which had been valued much higher than Wyndham’s stock, to drive valuation. For Wyndham to buy Choice, it would have to take on significant debt and would have to issue a lot of new stock, which would be dilutive to earnings.
How a Deal Impact Wyndham Shareholders
As proposed, Wyndham shareholders would only receive two seats on the Board of Directors of the combined company, which is a small, minority voice. The combined company would have more debt and a higher Debt-to-EBITDA ratio as Choice would have to borrow a significant part of the purchase price. Choice would also focus on “synergies,” which means cutting costs, cutting employees and possibly reducing services.
Why AAHOA (Asian American Hotel Owners Association) Doesn’t Like It?
AAHOA members reportedly own more than 60% of Choice- and Wyndham-branded hotels, and the organization is concerned that the combined company would have more than 16,500 hotels and 46 brands, totally dominating the U.S. economy, midscale and upper-midscale hotel segments. A combined company would weaken the power of franchisees, force them to share the same brand reservation systems and would weaken any applicable areas of protection. In addition to opposing the deal, AAHOA has already pushed for an FTC investigation and has indicated that it will try to block any antitrust approval.
How a Deal Could Happen?
Several changes could facilitate a deal:
- A higher overall price for each share of Wyndham stock.
- A greater percentage of cash versus newly issued stock.
- A meaningful termination fee paid to Wyndham if the deal does not close, due to regulatory, antitrust or any other reasons.
- Protection against changes in the Choice share price prior to closing so that the amount received per Wyndham share does not decline.
- A limit to the amount of new debt taken on, which makes overall execution riskier and is usually frowned upon by public investors.
Will a Deal Happen?
Never say never. Though both sides have reportedly not reengaged on talks, as outlined by Choice CEO Pat Pacious, he still is optimistic on getting a deal over the finish line. Stephen Holmes, chairman of Wyndham, however, is less sanguine; in fact, he is downright dismissive and did not mince words on his company’s third-quarter earnings call, stating: “I used to always say that I don’t comment on M&A rumors, but this one is not a rumor. And it also is not really M&A. It seems like a desperate grab to try to solve problems that Choice has.”
Me? I still think a deal will happen, one with sweetened terms that are more attractive to Wyndham shareholders and one that better incorporates protections for Wyndham.
Sometimes, conflict is good in a negotiation process. As it’s been said: “It’s the clash of two ideas, which then, all being well, produces a third idea.”
Story contributed by Jonathan Falik of JF Capital Advisors, a hotel investment advisory form.