Mergers and acquisitions is a binary pursuit: a deal gets done, a deal does not get done. Most are clear cut: scrutinized, negotiated, accepted by both parties, who believe in its equal benefits.
The public-turned-hostile, rancorous-from-the-get-go proposed merger between Choice Hotels International and Wyndham Hotels and Resorts is anything but black and white and both sides are dug in.
On the one hand, Choice believes a deal of this magnitude would actually lower costs for franchisees. Pat Pacious, president and CEO of Choice Hotels, said 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 the value of their assets and their return on investment.”
On the other hand, Wyndham believes a deal would do anything but and, moreover, were never jazzed that a significant component of the proposed deal involved Choice stock, “which the Board believes is fully valued relative to Choice’s growth prospects, especially when compared to Wyndham.”
Financials and posturing aside, there is one element that could make it all a nonstarter: the Federal Trade Commission. The FTC has been around since 1914 with a mission to protect consumers and competition by preventing anticompetitive, deceptive and unfair business practices. It seeks to uphold and enforce antitrust law, which regulates the conduct and organization of businesses to promote competition and prevent unjustified monopolies.
Most think the FTC safeguards the end user—a customer who purchases a hotel room, for example. In the case of Choice and Wyndham, the customer is the franchisee who owns a hotel under one of those companies’ brands. One of Wyndham’s main points of contention has been the potential hurdle of a merger even receiving approval from the FTC. To this, Choice responded: “The FTC will come to its own independent assessment of the proposed transaction’s competitive merits based on the specific facts, like it does on every M&A transaction.”
Deal or No Deal
Indeed, the FTC could be the final arbiter, not a board. HOTELS spoke to sources close to the matter on the condition of anonymity for their views on what up to now could be characterized as a morass, a game of brinkmanship. To a man, they said a deal of this sort would not only unlikely pass the FTC smell test, it’s also been injurious to prospective franchisees left in limbo as to how the whole situation will shake out.
A merger between Choice and Wyndham would create a midscale/economy hotel behemoth. A combined company would have some 16,500 hotels with more than 45 brands and dominate the economy/limited-service segment. Consider AAHOA, which represents some 20,000 mainly Indian-American hotel owners in the U.S., who own around 60% of all hotels in the U.S. Some own one; some own many. Its CEO, Laura Lee Blake, and chairman, Bharat Patel, both voiced opposition to the deal, largely based on the notion of franchisee protections.
“As the owners of more than two-thirds of both Choice Hotels and Wyndham-branded hotels, AAHOA Members have much at stake with Choice’s potential purchase of Wyndham,” said Patel. “To have one franchisor Choice Hotels control so many economy and limited-service hotels will give our members little opportunity to have a say in whether the franchise mandates and requirements are fair, and significantly limit their options to find a different brand under which they could successfully operate their hotels.”
“We support Wyndham’s rejection of this proposal,” said Blake. “We further call on the federal agencies, including the Federal Trade Commission, to do a thorough investigation to fully protect competition in this segment of the industry.”
FTC Review
In December 2023, the U.S. Department of Justice and the Federal Trade Commission set forth merger guidelines, which explain how the DOJ and FTC identify potentially illegal mergers. It notes… “a merger that creates a firm with a share over 30% is presumed to substantially lessen competition or tend to create a monopoly…” According to STR data, the market shares of a combined company in this proposed transaction would be 57% of branded economy hotel franchisees and 67% of branded midscale hotel franchisees.
One source, involved with FTC and antitrust cases for more than two decades, told HOTELS that “this is among the simplest antitrust cases I have ever encountered,” incredulous that Choice was even trying.
HOTELS reached out to Choice Hotels and Wyndham Hotels & Resorts by email for comment on this story, but received no response.
“When you think about franchisees, if you take away the top two franchisor options for people that want to run economy and midscale hotels, you’re reducing their options,” a source further told HOTELS. “And when you take away those top two options, you’re going to make it more expensive for the owners to operate those hotels.”
A prevailing sentiment is that a merger of this sort would allow Choice to have autonomous control on pricing and that without competition would have carte blanche to charge higher fees for products and services and more.
The franchisee community has been vocal over the proposed deal, proportionally against it. One is Rich Gandhi, who at one point had four Choice-branded hotels but flipped them to other brands. He leads a group called Reform Lodging, which is against the deal and, according to its website, seeks to “uphold the welfare of the hospitality industry and its leaders.”
“I do not see how the consumer benefits from a subpar franchisor merger,” Gandhi told HOTELS. “Choice’s theory of why it benefits the consumer is totally bogus. Consumers don’t particularly care about the Choice rewards system over Wyndham’s, but it does benefit the shareholders of Choice, because it gives them more power to gouge the franchisee base, which really increases Choice shareholder profitably at the expense of franchisees.”
One red flag is the speed to which this proposed merger has come across the radar of the FTC, which had interest in it well before it needed to. In fact, prior to Choice turning hostile on Wyndham, on December 12, Choice reportedly had met with officials from the FTC a week prior. On the 12th, Choice filed a Hart-Scott-Rodino notification in order to begin the requisite regulatory review, which runs for 30 days—up around to January 12. It’s within those 30 days that the FTC looks at any competitive issues that warrant additional scrutiny. Before the initial 30-day review runs out, Choice has the option to do what’s called a “pull-and-refile,” which effectively restarts the clock and gives an additional 30 days further time for review.
At the heart of this merger are questions over competition, a major pillar within a free market. Competition compels companies to do things that they might not do if there was no competition. Hotel franchisors are in the business of coaxing prospective franchisees to build hotels with their brand flags—a perfect example of using other people’s money for your benefit. However, cajoling them sometimes takes more than an eloquent tongue and hearty promise. It sometimes takes money. In the hotel industry, this is referred to as key money, an up-front payment to a hotel owner to secure a franchise agreement. There is nothing untoward about it; it’s part of the game.
But what if there was less competition for deals? “There’s going to be no incentive for Choice to continue offering that money if Wyndham is not in the picture,” a source said. “There’s just no incentive. It makes sense why Choice wants to purchase Wyndham.”
Unsolicited bids that progress into a hostile bids rarely result in a deal being closed. Choice Hotels’ own financial advisor, Moelis & Company, raised the point during a recent conference focused on mergers & acquisitions and hosted by the Practising Law Institute. During one panel, Anton Sahazizian, global head of M&A for Moelis, presented a slide titled: “Hostile Tender Offers Typically Avoided by Acquirers.” It showed that since 2019 there have been 98 unsolicited offers made with an enterprise value above $1 billion. Of those, 10 became hostile, meaning the target rejected the bid. Subsequently, of those 10, four went to a hostile tender offer and none of those closed.
Despite their track record, some hostile bids do get done. One of the more prominent ones in recent memory was InBev’s acquisition of Anheuser-Busch in 2008. InBev’s initial attempts to acquire the maker of Budwesier were batted away, but in the end, a deal was made at $70 a share, valuing the deal at $52 billion. The entire deal took about a month. The Choice and Wyndham hullabaloo is now going on its fourth month, after an initial bid by Choice of $90 a share and a $7.8 billion valuation. (Note: AB InBev’s market share in dollar terms rose to 40.4% in the first four months of 2023 in overall U.S. beer sales.)
In the Public Eye
There’s no denial that Choice and Wyndham had multiple face-to-face discussions about a merger. It’s public record. Though Pat Pacious has been the face of Choice through the proceedings, Stewart Bainum, the Maryland-native, one-time politician and longtime chairman of Choice Hotels, presumably, is calling the shots. One source HOTELS spoke to said Bainum has a reputation for being “a little bit of a cowboy,” promising that a deal between Choice and Wyndham could be get done within 60 days.
Despite Bainum being a prolific Democrat supporter (he reportedly gave $2 million to the Biden campaign in 2020), don’t expect a Biden FTC to rule in his favor. As a recent Bloomberg story pointed out, the Biden administration has “doubled down on efforts to block more mergers after decades of a light-touch approach by government.”
“For too long, unchecked consolidation has meant big corporations getting bigger, giving them the power to raise prices for Americans and provide consumers with fewer options,” said Lael Brainard, President Biden’s National Economic Advisor.
The murkiness and suspense of a proposed merger doesn’t mean it’s not having an immediate and punitive effect. Since Choice and Wyndham are two of the top games in town for economy and midscale flags, prospective franchisees are being kept in limbo, a game of “will it or won’t it” happen. Should a franchisee elect to choose a Wyndham brand, what assurance do they have that it will remain part of Wyndham? Conversely, if a franchisee selects a Choice flag, what certainty does it have that it won’t become a smaller fish in a sea of owners?
“[Choice] has realized that it can be very disruptive to [Wyndham’s] business at very low damage and cost to themselves by prolonging this situation,” one source told HOTELS. “One of our big concerns is the disruption to business.”
Beyond FTC acceptance, an ensuing proxy fight is sure to be heated. Since, at present, Wyndham is not in the mode of facilitating a transaction, Choice, a Wyndham shareholder (reportedly holding some 1.5 million shares) can nominate directors to the board. The window to do so is January 10 to February 9, after which, Wyndham holds its annual shareholder meeting in the summer, where an election would come to pass.
One source told HOTELS that it believes Choice’s hostile bid for Wyndham is an act of desperation, a band-aid for what the source referred to as stalled growth. “They enjoyed a premium on their multiple compared to Wyndham for many years. A lot of that was driven by their ability to drive room growth at an impressive rate.”
The band-aid, the source said, was Choice’s 2022 acquisition of Radisson Hotels Americas, prestidigitation disguised as room growth. The source said that Choice maintaining that multiple was imperative to buying Wyndham.
The proposed merger of Choice and Wyndham is a dynamic situation, vacillating with each Choice missive and Wyndham response. Opposition to the deal has been voiced and an uphill battle with the FTC is unavoidable. Still, sources told HOTELS that they believe this process will be drawn out. “They are not letting go.”