Choice Hotels International executives are publicly offering a combined $9.8 billion to purchase Wyndham Hotels & Resorts after claiming the latter company walked away from the negotiating table "a few weeks ago."
Wyndham officials have responded to the offer calling it risky and "not in the best interest of shareholders."
Choice's offer includes $7.8 billion in combined cash and stock and another $2 billion in assumed debt.
Separately, the two companies are already among the largest players in the economy and midscale segments, and a merger could propel the combined company into a dominant position in that space.
At the end of the second quarter, the companies — both asset-light hotel brands — had a combined 16,600 hotels.
Wyndham's latest portfolio count had 9,100 hotels in 95 countries with 24 brands and a development pipeline of nearly 1,850 hotels. Choice currently has 22 brands with nearly 7,500 hotels in 46 countries and 899 hotels in its pipeline.
In a news release announcing the company's proposal, which is for $49.50 in cash and 0.324 shares of Choice common stock for each share of Wyndham stock — a combined $90 value — Choice CEO and President Patrick Pacious said "the value-driven leisure and business traveler would benefit from the combined company's rewards program, which would be on par with the top two global hotel rewards programs, enabling them to receive greater value and access to a broader selection of options across stay occasions and price points."
In a note to investors, Michael Bellisario, senior hotel research analyst and director at Baird, said a merger of the companies would "make long-term sense," but the debt involved and investor sentiment might sour a deal.
"Financially, the pro forma leverage profile is quite high," he wrote. "How many [Wyndham] shareholders want [Choice] shares? Is now the right time to be adding $4.5 billion of debt? Can Choice raise its offer?"
At the close of trading Monday, Wyndham's stock was trading at $69.10 a share.
Path to a Deal
Pacious publicly disclosed that negotiations broke down with Wyndham "a few weeks ago" after Choice officials felt they were nearing the finish line for a deal.
"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. 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," Pacious said in a statement.
Choice officials have already launched a website dedicated to the potential deal called createvaluewithchoice.com.
A potential deal between the two companies was first reported by the Wall Street Journal in May, and Choice officials now say they've been in some level of discussions about a business combination with Wyndham for roughly a decade.
Those negotiations heated up privately between the companies in late April when Choice offered roughly $80 per share to buy the Parsippany, New Jersey-based company, increasing the offer again in May to $85 per share and in August to $90.
In a letter addressed to Wyndham Chairman Stephen Holmes, Pacious wrote he believed a deal represents significant value to shareholders:
"The implied valuation also reflects a 14.9x multiple of your consensus 2023 [earnings before interest, taxes, depreciation and amortization] estimates, a forward multiple that Wyndham has never achieved absent COVID disruptions, and comes at the high end of your equity research analyst price targets," he wrote. "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."
Past Brand Deals
If it goes through, it would the largest deal between hotel brand companies since the combination of Marriott International and Starwood Hotels & Resorts Worldwide, which closed in September 2016 for $13.3 billion. Starwood shareholders received a payout at closing of $21 in cash and 0.8 shares of Marriott Class A common stock for each share of Starwood common stock.
The closing of the Starwood acquisition came months later than Marriott officials had originally projected and at a significantly higher cost than originally planned, since the deal was originally announced with a $12 billion price tag and a mid-2016 closing date. Both issues were tied back to issues in China, starting with a bidding war for Starwood with Beijing-based Anbang Insurance Group and ending with a prolonged regulatory review for the deal with Chinese anti-trust regulators.
Choice completed another brand acquisition in 2022 with the $675 million purchase of Radisson Hotel Group Americas. That deal added 624 hotels with 68,000 rooms to Choice's portfolio.
Pacious has been generally open about his company's appetite for acquisitions, noting during the company's second quarter earnings call that he saw "a lot of potential opportunities."
“We’re always looking for [mergers and acquisitions] that fit the two litmus tests that we talked about: improving the [return on investment] for the owners and growing the brands for the shareholders,” he said. “As we look forward, there’s still some white space in our portfolio.”
Wyndham's Response
In a statement attributed to Wyndham's Chairman Stephen Holmes, the company clearly rejected Choice's overtures and called the $90 per share offer "underwhelming" and an "opportunistic attempt to take advantage of point-in-time stock prices fluctuations coinciding with a time period where the exchange ratio is favorable to Choice."
"Choice's offer is underwhelming, highly conditional, and subject to significant business, regulatory and execution risk. Choice has been unwilling or unable to address our concerns," Holmes said. "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. 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."
Wyndham officials also laid out their own timeline of events, which included multiple conversations in September about "regulatory and execution considerations."
"During the course of September 2023, Wyndham's counsel held multiple conversations with Choice's counsel to discuss regulatory and execution considerations, 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," Wyndham's news release states.