Stephen Holmes, chairman of the board of Wyndham, had not been on a Wyndham Hotels & Resorts quarterly earnings call for some six years. Until now. Now, after Choice Hotels International went public with its effort to acquire Wyndham’s hotel business, an attempt that up to now has been unequivocally and formally spurned by Wyndham.
“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,” Holmes firmly said during Wyndham Hotels & Resorts’ third-quarter earnings call.
Holmes did not mask his contempt for what he perceives to be bad behavior by Choice to air its bid publicly for the company. After some six months of ongoing talks, the Wyndham board at the end of September formally rejected Choice’s offer of $90 per share, a mix of cash and stock. On October 17, Choice came out publicly, taking its bid directly and into the open to Wyndham shareholders.
In the ensuing days, Holmes said he has not had further discussions with either Pat Pacious, president and CEO of Choice Hotels International, or Stewart Bainum, chairman of Choice Hotels International since October 1997, after disengaging from talks. In doing so, Holmes revealed an up-to-now unknown story. According to Holmes, 20 years ago, he negotiated a deal to buy Choice. “And I never talked about it because it’s not appropriate,” he said. A deal was purportedly negotiated but the capital markets turned and it never came to fruition. “I’d done 40-plus deals, but this one just wasn’t going to work. We went our merry way,” he said.
“This time is different,” he continued, pointing out faults within Choice. “They’re not growing, they have some serious issues within their organization and they’re trying to address that by making us the elixir for their problems. We weren’t looking to sell the company, they called us, and they don’t have a plan, [beyond] repetitive press releases—that’s a bit of a desperate plan.”
Prior to Wyndham’s Q3 earnings call, Choice issued a press release, calling on Wyndham Hotels & Resorts “to engage in good faith discussions so that shareholders of both companies can benefit from the compelling combination.”
“We appreciate the positive feedback we have received since first making our proposal public, particularly the support from both companies’ shareholders and franchisees,” Choice’s Pacious said. “Through our conversations with these stakeholders, we are encouraged by their clear understanding of the natural fit of the two businesses and belief in the combined company’s ability to drive greater shareholder returns, franchisee profitability and strategic benefits. They, and others, share our perspective that a transaction is pro-competitive, has a clear path to completion, and creates a combined company with a strong free cash flow profile to support both rapid deleveraging and investments for growth.
“We respect Wyndham’s desire to achieve the best outcome for its shareholders, but that can’t happen if Wyndham unilaterally ends our discussions. Both companies’ shareholders have expressed to us their understanding of the tremendous value this combination could deliver. As recently as a few weeks ago, Wyndham prepared a critical information request list, on which both parties broadly aligned, to help Choice and Wyndham close any remaining value gaps. Wyndham then disengaged before any information was exchanged. We therefore strongly urge Wyndham to return to the discussions. Choice is ready to move expeditiously to negotiate binding terms, including mechanisms to provide market standard protections for Wyndham shareholders.”
For its part, Choice has established a microsite that outlines why it believes a merger of the companies is a strong outcome for both shareholders and franchisees.
Not surprisingly, Wyndham pushed back on its call with analysts. For its part, it issued a 33-page deck outlining why it rejected Choice’s offer.
These were further elucidated by Wyndham Hotels & Resorts’ President & CEO Geoff Ballotti. There are three main reasons Wyndham presented as to why it rebuffed Choice’s overture to acquire the business: 1) an uncertain regulatory timeline; 2) the offer undervalues Wyndham’s growth prospects as a standalone company; 3) Choice’s slower-growing business and, post-transaction, higher leverage negatively impacts the equity consideration.
Beyond these line items, the financial terms and their calculus did not pass muster with the Wyndham board. As Ballotti was quick to point out: “While the offer may have had an initial headline of $90 per share, the proposal is currently worth less and may continue to fluctuate in value over time, as it includes a significant amount of stock consideration.”
Choice’s stock is currently trading at $112 as of Thursday, but is down 7.6% in the past month.
“It’s important to note,” Ballotti added, “that Choice has not offered our shareholders any protection against potential continued downward volatility.”
As it relates to closing any deal against a regulatory timeline, Ballotti said that the fixed value of the cash portion would likely not be realized until that process as completed, “which our advisors estimate could take 12 to 18 months,” Ballotti said, concluding that “the actual offer is worth materially less to our shareholders if and when they receive it.”
Those remain the primary reason for Wyndham’s board rejecting the deal.
Other organizations are siding with Wyndham. Consider AAHOA, which represents some 20,000 mainly Indian-American hotel owners. It’s CEO, Laura Lee Blake, and chairman, Bhrat Patel, both voiced opposition to the deal, largely based on the notion of franchisee protections.
The cited a merged company that would have 16,500 hotels with 46 brands and dominate the economy/limited service segment.
“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.”
“This news of a potential merger has sent a shock wave of high concern and even fear through our AAHOA membership,” said Blake. “We have seen in the past the major impact that mergers and acquisitions by the big hotel franchisor corporations can have on our members as the hotelier franchisees. Indeed, our AAHOA members fear a significant further dilution of the brands, and fighting over the guest reservations on one reservation system. The changes can be highly disruptive to their business practices, and even cause a significant decrease in revenues overall.
“We support Wyndham’s rejection of this proposal,” Blake continued. “We further call on the federal agencies, including the Federal Trade Commission (FTC), to do a thorough investigation to fully protect competition in this segment of the industry.”
Questions are already arising that take into consider where this rigmarole will land. “Developers who have not yet broken ground are wondering if they are building an Echo Suites by Wyndham, extended-stay economy brand or are they building it for Choice and that’s certainly what we’re concerned about,” Ballotti said. “I don’t think our Days Inn or Super 8 owners on any street corner in America would want to share guests with a Choice Econo Lodge or Rodeway.”
What’s next? Choice could try and initiate a proxy fight, which it may have already done by going public with its offer; they could stand down; the could keep the pressure on and maybe sweeten the pot with a higher offer. Maybe Wyndham’s hard-line rejection of the offer is just smoke to juice the terms.
If you listen to Holmes, however, he seems staunchly opposed to a deal ever happening. “They have to decide if they want to lay down their pen in their PR machine and let’s all get back to business,” he said. “We can’t force that to happen. It’s not attractive what they’re doing; I don’t think very friendly. God only knows how they can get a deal through the FTC where we are not a willing participant. The ball is really in their court.”
For the quarter, Wyndham’s fee-related and other revenues were $400 million, up from $375 million in Q3 2022, and attributable to global RevPAR increasing 3% compared to the same time a year ago, net room growth higher license and ancillary fees and the pass-through revenues associated with the company’s global franchisee conference in September. The company generated a net income of $103 million.