Within hospitality circles, it was talked about: Choice Hotels was making a play for Wyndham Hotels & Resorts. What was hearsay has now been exposed to the light.
Choice Hotels International has come out publicly with a proposal 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. The proposal implies a total equity value for Wyndham of approximately $7.8 billion.
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% premium to Wyndham’s 30-day volume-weighted average closing price ending on October 16, 2023, an 11% premium to Wyndham’s 52-week high, and a 30% premium to Wyndham’s latest closing price.
Choice’s airing of the proposed deal comes after Choice said Wyndham disengaged from discussions with Choice after six months of dialogue. “A few weeks ago, Choice and Wyndham were in a negotiable range on price and consideration, and both parties have a shared recognition of the value opportunity this potential transaction represents,” said Choice Hotels President & CEO Pat Pacious. “We were therefore surprised and disappointed that Wyndham decided to disengage. 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. Importantly, we remain convinced of both the many benefits of the combination and our ability to complete it.”
Choice’s early morning reveal was later met with a rebuttal by Wyndham. A press release from the company read: “After close review, Wyndham’s Board of Directors has unanimously rejected Choice’s highly conditional, unsolicited stock-and-cash proposal bid to acquire all outstanding shares of Wyndham.”
In rejecting Choice’s proposal, the Wyndham Board of Directors outlined three initial reasons:
- the proposed transaction involves significant business and execution risks, including an extended regulatory timeline and uncertainty of outcome, potential franchisee churn, and excessive leverage levels at the pro forma combined company
- the consideration mix includes a significant component of Choice stock, which the Board believes is fully valued relative to Choice’s growth prospects, especially when compared to Wyndham
- the offer is opportunistic and undervalues Wyndham’s future growth potential
“While our board would support a value-maximizing transaction, given the substantial, unmitigated embedded risks and value destruction potential presented by the proposed transaction, our board determined it is not in the best interests of Wyndham shareholders,” said Stephen Holmes, chairman of the Wyndham Board of Directors. “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.”
Pacious said that a deal of this sort and magnitude would “accelerate long-term organic growth” for Choice and Wyndham, and that “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.”
Pacious appeared on CNBC Tuesday morning, telling “Squawk Box” host Becky Quick that “by bringing the two companies together, we believe that through direct bookings, lower operating costs and a much more robust rewards program, we have an opportunity to help our owners of our franchises really improve their value their assets and their return on investment.”
He further said, “Over the past five years, since they’ve been a separate standalone company, we’ve had effectively a two-times-multiple advantage over their business and so the shareholders have in their world and in our world seen that difference in the gap of the earnings multiples that we have. What we’re offering is actually to pay them something very close to our historic multiple nominators. So we feel like it’s a very compelling offer for their shareholders.”
Choice Hotels consuming Wyndham Hotels would create a mid-tier giant. Choice Hotels currently has 22 brands and nearly 7,500 hotels, representing almost 630,000 rooms, in 46 countries and territories. Some of its more well-known brands are Comfort Inn & Suites and Sleep Inn, hotels sought out by value-conscious travelers.
Wyndham, meanwhile, is even larger than Choice with more than 9,000 hotels worldwide and 24 brands, such as Super 8, Days Inn and La Quinta, similarly targeting value-conscious travelers.
Both companies are basically pure franchisors (Wyndham manages a smattering of properties in the higher-end scales), wherein owners of properties pay them fees for their branding, loyalty programs, reservations systems and technology.
A combination of Choice and Wyndham would create a loyalty base of some 160 million combined rewards program members.
Choice Hotels has been on an acquisitive run. In August 2022, it completed the acquisition of the franchise business, operations and intellectual property of Radisson Hotels Americas for approximately $675 million from Radisson Hotel Group.
Wyndham has made smaller plays, buying, for instance, Germany’s 40-hotel, 6,000-room Vienna House brand for $44 million from Berlin-based HR Group last summer.
In a note from Truist commenting on the now public proposal, the bank wrote in part: “In our opinion, this is an attractive offer for Wyndham Hotels shareholders, though we note Wyndham’s chairman (and former long-time CEO) is very well-versed in M&A and may be strategically holding out for a somewhat better offer from Choice or from someone else.”
In a morning call with Choice management, Truist revealed that Choice suggested that the merger would be attractive to all stakeholders, including franchisees, in part from doubling the system fee to $1.2 billion from $600 million. Choice also pointed to opportunities to improve the RevPAR of existing Wyndham hotels and open up Wyndham’s upscale brands within a larger Choice system.
The History
According to Choice, it has been engaging with Wyndham for nearly six months and in April 2023 sent an initial letter to Wyndham regarding a potential transaction, proposing to acquire Wyndham for $80 per share, comprising 40% cash and 60% Choice stock. The proposal represented a 20% premium to the closing price of Wyndham common stock on April 27, 2023 and a 19% premium over Wyndham’s 30-day volume-weighted average share price as of such date.
Wyndham, Choice said, rejected the proposal and refused to engage in further discussions.
Thereafter, Choice said it continued in its attempt to engage with Wyndham, increasing its proposal to $85 per share, comprising 55% cash and 45% Choice stock, explaining that further discussions could clarify Wyndham’s hesitation to proceed with negotiations. The companies’ respective Board Chairs and CEOs then met in person; following that meeting, Choice improved its proposal yet again to a consideration to $90, comprising 55% cash and 45% Choice stock.
In late August 2023, Choice sent a letter signed by Pacious to Wyndham’s chairman of the board, Stephen Holmes. In part reading, “I am writing this letter to reiterate our strong interest in pursuing a business combination with Wyndham Hotels & Resorts. This fourth letter takes into consideration the feedback we received from you following our conversations and our last letter, dated May 31, 2023, and materially increases our offer” to the $90 per share threshold.
The letter continued: “Our proposal to acquire Wyndham at a premium valuation reflects our conviction that a combined company will deliver significant value to shareholders—value creation, including over $100 million of target cost synergies, in which your shareholders will have the opportunity to participate. As 35% owners of the proforma company, Wyndham legacy shareholders stand to benefit from over $500 million of value creation from the realization of cost synergies, in addition to the compelling premium offered and participation in the multiple expansion of the Wyndham business.
“As you know, and as we have stated multiple times in the past, we respect what you, your management team and your board have accomplished. We have made extraordinary efforts to initiate a direct dialogue with you regarding the key economic terms of a Transaction, and while we recognize the interactions to date, we view them as limited, cursory and dismissive. We are perplexed by your obvious resistance to a frank and open commercial dialogue in light of the compelling value we are offering your shareholders, including the opportunity to participate in the future value creation of the combined company. This enhanced proposal, which is based on public information, represents our best and final offer.”
In September 2023, Choice and Wyndham board chairs continued engagement, Choice said, and “Wyndham acknowledged the strategic rationale of the proposal and that terms were within a negotiable range but raised questions regarding the value of Choice stock and timing for obtaining regulatory approvals.”
In response, Choice said it proposed to enter into a one-way, short-term, non-disclosure agreement to facilitate Choice providing information that would address Wyndham’s concerns. However, during a follow-up call between the chair of each company’s board and their respective advisors, Choice said that Wyndham made clear their unwillingness to proceed with further discussions.
Wyndham, Choice said, then decoupled from further discussion.
Later in the day, Wyndham made public its version of events.
In June, Wyndham’s Holmes met with Pacious in person to explain Wyndham’s concerns about Choice’s proposal, including the regulatory risks. Two months later, in August, Pacious phoned Holmes and provided a third unsolicited verbal offer—the $90 per share—with 55% of the consideration in cash and the remainder in Choice stock. A few days later after the phone call, Holmes met in person with Pacious to reiterate Wyndham’s concerns over the proposal, including the regulatory risks, “none of which were addressed in Choice’s latest proposal.”
That same month, Choice formally submitted the third bid in writing to the Wyndham Board, which concluded that the revised proposal “continues to substantially undervalue Wyndham relative to its future growth prospects, includes a substantial stock component which the board believes is fully valued relative to Choice’s growth prospects and involves significant business and execution risks for Wyndham shareholders.”
Wyndham said it offered to enter into a customary confidentiality agreement to facilitate discussions, but that Choice refused to sign.
In early September, Holmes and Pacious had another phone call, Wyndham said, to again discuss Wyndham’s reservations over the deal. Wyndham said that “hose issues remain unaddressed by Choice as of today.”
Through the course of September, Choice and Wyndham attorneys, Wyndham said, engaged in multiple conversations, “but Choice was unwilling to propose any mitigations to address Wyndham’s concerns about these risks and was unable to provide any convincing evidence of a pathway to resolve concerns raised by Wyndham.”
On September 27, 2023, Holmes informed Pacious of the Wyndham Board’s decision to reject the Choice offer.
Any deal would have a big hurdle in receiving regulatory approval given that a merger would ostensibly give Choice a monopoly within the economy and midscale hotel segment. Truist, in their call with Choice, said the company was “confident they can receive all regulatory approvals in due course and that the transaction would be pro-competitive.