Choice Hotels International's pending acquisition of Radisson Hotel Group Americas makes sense, according to hotel industry experts and analysts.
Choice announced Monday it had entered into an agreement with Radisson Hotel Group to buy its Americas division, adding 624 hotels with 68,900 rooms to its portfolio for $675 million. The deal would grow Choice’s presence in the upscale and upper-midscale segments in U.S. West Coast and Midwest markets.
There was speculation ahead of the deal that Radisson Americas would be acquired at some point, said C. Patrick Scholes, managing director of lodging and leisure equity research at Truist. The company had been through a number of ownership changes and turnover in executives.
At the same time, executives at big hotel brands such as Choice and Wyndham Hotels & Resorts have been vocal about seeking acquisition opportunities, Scholes said.
Radisson also has been lacking a big guest reward program comparable to other brands, “which in today’s day and age is crucially important as far as getting people loyal to your system and promotes advertising and marketing aspects,” he said.
The $675 million price tag was attractive — anything that’s accretive off the bat is a positive deal, Scholes said. If the market wasn’t tumbling on the day of the announcement, Scholes said he would have expected Choice’s stock to increase a couple of dollars per share. At the time of the interview Monday afternoon, Choice’s stock was flat to up slightly when its peers were all down along with the rest of the market.
“The fact that the stock is flat ... that's as good as we're going to give anybody today,” he said.
Choice had a balance sheet that was under-levered, and analysts and investors were asking if the company was going to buy back stock or do a special dividend, said Michael Bellisario, senior research analyst at Baird. The Radisson deal answered that question.
“Is it a one plus one is three deal? Only time will tell,” he said. “But when you think about hotel brands and you look at [mergers and acquisitions] in the past, size and scale and distribution are what matters, and this is additive from Choice’s perspective to get that.”
David Loeb, a former analyst with Baird and owner of Dirigo Consulting LLC, which advises on capital markets, strategy and communications issues, said he thinks it’s a good deal for both companies, since Radisson has struggled to gain momentum with its American brands and Choice will be able to add the brands to its portfolio, offer franchise opportunities to its existing owners and offer more choices to its customers.
“It’s smart on both sides,” he said. “This makes all the sense in the world. It looks like a price that was attractive for Choice.”
Radisson is still having success in Europe, but its position among other leading brands in the U.S. made this move ideal for the company, he said.
“In the states, they just haven't really gotten the same kind of momentum. It seems like a smart decision to essentially monetize that and allow a new owner to be able to bring new skills to the table,” he said.
Integrating the Brands
Choice has a strong track record of integrating brands, Scholes said, citing its acquisition of WoodSpring Suites in 2018. The extended-stay brand has since performed well for Choice.
“I would expect similar here,” he said. “It’s definitely a bigger acquisition, but it’s an opportunity for them to fold [Radisson] in and ... work on getting a bit of market share back for Radisson.”
As a franchisor, Choice isn’t investing a lot of capital into things such as renovations, but this deal does open opportunities to prevent owners from leaving Radisson’s brands, Scholes said. What also helps is that Choice has done an excellent job taking its comparative marketing share, a point company executives make at each earnings call, he added.
Choice’s revenue-management system has helped owners avoid cutting rates during the latest downturn and kept them from resorting to online travel agencies too much, he said.
The WoodSpring deal was well-timed and has been a growth driver for Choice, Bellisario said. However, it’s hard to see Radisson being as good a performer and growth driver, he added. The WoodSpring deal benefited from the pandemic, and it’s difficult to foresee that happening again.
Radisson’s Americas operations have changed ownership several times over the years, which raises questions whether net unit growth, marketing spending, brand equity and customer perception have been negatively affected, Bellisario said.
It will be interesting to see how Choice as the owner of a brand — or part of a brand — can address any of the things that have gone awry during those ownership changes, he said.
Speaking with Choice’s management team, Bellisario said he learned the plan is to put the Radisson brands into Choice’s platform and work to increase revenue per available room. The team also hopes to push up royalty rates over time given what they’re offering franchisees.
“There’s no question they’ve got work to do to integrate the brands and to motivate their existing customers to try these new brands. There’s also work to [be done] to the franchisees to demonstrate that the returns will be there in the future with these additional brands,” he said.
Loeb said he expects Choice will leave most of the newly acquired brands as they are and focus on cross-selling with existing owners and loyalty customers. Winning over Radisson owners and convincing customers to try other Choice brands will also likely be a priority.
Brand Mergers, Acquisitions
Wyndham was vocal during its most recent earnings call about its appetite to buy another brand, Scholes said. When he met with the company last month, the company had the same desire. While Radisson is off the table, Scholes said it would make sense if Wyndham has another deal in the works.
“It wouldn’t surprise me if we see something from Wyndham in the next quarter or two,” he said. “Obviously, it’s analyst speculation, no guarantees.”
Bellisario said the Radisson deal at its price tag of $675 million would have been a little big for Wyndham’s balance sheet, not leaving it any room to buy back any stock, he said.
“You never really want to be in a position where you’re fully maxed out,” he said. “You can’t take advantage of dislocations like we’re maybe in the midst of right now.”
Bellisario said Hilton has been disinterested in acquiring other brands; Hyatt Hotels Corp. is currently digesting Apple Leisure Group, so it likely doesn’t have anything else on the docket anytime soon; and while Marriott has the capacity for a big deal, it’s been focusing on partnerships to grow its all-inclusive resorts platform.
Still, the world is in a better place, as are balance sheets, he said.
“Deals don’t get done on March 31, 2020, when the world is falling apart,” Bellisario said. “Deals get done when fundamentals are better and capital is more widely available.”