After a failed hostile takeover attempt of competitor Wyndham Hotels & Resorts, Choice Hotels International has to demonstrate a new path to growth to quell market concerns, while Wyndham executives must deliver on promises of better growth as a standalone company, said analysts who cover both companies.
C. Patrick Scholes, managing director of lodging and leisure equity research at Truist Securities, said Choice executives need to focus on the next step for their "core net-unit-growth strategy" as the company has lagged in pipeline and fee growth compared to its hotel brand peers. More hotel brands have been moving into the midscale segment that Choice has been a large player in.
"It's highly competitive for Choice, and the challenge Choice has is while all their competitors have been introducing new brands, Choice hasn't been doing that," he said. "They've been, over the last year, focused on getting Wyndham, and unfortunately, that did not turn out well for them."
Scholes added Choice has particularly lagged behind its competition in international unit growth, which was likely one of the drivers of its Wyndham pursuit.
Wyndham's next steps are much more straightforward, analysts said. In their attempts to beat back Choice's pursuit, Wyndham executives regularly trumpeted how they are better poised to grow as a standalone company than as part of Choice — particularly with the antitrust issues that would plague a deal and the debt Choice would have to take on. Now Wyndham has to deliver on those growth promises, after a long period of lagging behind hotel brand peers in terms of stock price, or face additional investor scrutiny.
"They need to prove that their stock is as undervalued as they said it was," said Michael Bellisario, senior hotel research analyst and director at Baird.
If Wyndham can't deliver on that growth promise, it's possible Choice could come back to the table, Scholes said.
"It's not 100% impossible that Choice could come back with this offer in six months to a year if Wyndham stock is still at $75 or $80, because Wyndham has been pretty adamant that they have — I believe the exact quote was — 'a pathway to deliver shareholder value,'" Scholes said. "Well, if it's a year from now, and you're still at $75 or $80, it's questionable if Wyndham can do that on their own."
As of publication time, Wyndham's stock was trading at $77.04 a share, and Choice was valued at $127.73. Choice's offer — which the company abandoned after getting too little uptake on an exchange offer to Wyndham shareholders — consisted of $49.50 in cash and 0.324 shares of Choice common stock for each Wyndham share. Combined, the offer was equivalent to about $90 a share.
Choice
Choice has perception issues to confront in the market, Bellisario said. He added that many people view Choice as "guilty until proven innocent."
"Choice needs to disprove some of the bearish fundamental narratives that are still out there today," he said.
Unit growth for Choice has traditionally been more heavily reliant on domestic U.S. growth than other brand competitors, and the bulk of growth for most hotel brands lately has been international. The company has also had a significant number of properties drop out from the recently acquired Radisson brands, he said.
On top of that, performance metrics for Choice's economy and midscale hotels have been mediocre, Bellisario said, but that's an industrywide trend, not a Choice-specific problem.
"That is an impediment to an incremental investor getting into the stock," he said. "You can say "Hey [the stock] is cheap, but [revenue per available room] is negative. It'd be different if it was sort of cheap but RevPAR was inflecting positively."
In recent years, Choice has made a handful of acquisitions to bolster growth, starting with extended-stay brand WoodSpring Suites, and more recently the 2022 purchase of Radisson Hotels' Americas business.
Analysts said the next logical acquisition for Choice would be something that bolsters international growth. Scholes said it's possible the company looks to acquire some smaller midscale or economy brands internationally, but it's impossible to speculate on what those targets might be. He said other brand companies such as Marriott International and Accor have had success with that strategy.
"[Choice] might be able to find something a little bit lower in select-service than what Marriott might go down to," he said.
Wyndham
Both analysts agreed the next steps for Wyndham are relatively straightforward: Deliver on organic growth promises.
Bellisario said Baird agrees that Wyndham stock has been fundamentally undervalued "for a long time," but he added many investors still see risks in the business model. The end of the drama between Choice and Wyndham could be a tailwind to portfolio and fee growth itself.
"For Wyndham, the fundamental positive is if they were having some troubles signing deals because Choice was disrupting their model, that is now removed. ... What it really comes down to for Wyndham is they need to execute, they need to grow earnings, get the stock price up, do what they said they're going to do, keep it clean, buy back a lot of stock, improve free cash conversion, and make sure that the growth algorithm is what they say the growth algorithm is," he said.
Could another buyer enter the fray? Bellisario said he's somewhat skeptical another company could swoop in to buy Wyndham. He added it's unlikely there are private equity buyers lining up to purchase Wyndham, and there isn't another public hotel company "that wants to do a deal with them."
But if Wyndham struggles to deliver on executives' promises, a private equity buyer could come in to "fix" a company they see as underperforming, similar to Blackstone's acquisition of Hilton in the 2000s, Scholes said.
"They would see an undervalued stock and an opportunity to come in and make changes," he said.