Wyndham Hotels & Resorts' position on an acquisition proposal from Choice Hotels International can be boiled down to three main concerns: risk, value and leverage. But, in an investor presentation and on an earnings call Thursday with analysts, the company's executives were much more candid in their rejection of Choice's bid.
On his first earnings call in six years, Stephen Holmes, chairman of Wyndham's board of directors, called Choice's public overtures "a desperate grab to try to solve problems that the company has."
Holmes outlined those problems, in part, as "no organic growth [and] a less vibrant loyalty program with virtually no international capabilities."
"We are frankly not surprised. Our business offers a medicine cabinet full of remedies. ... They're trying to make us an elixir for their problems. ... Our board has taken its fiduciary duties very seriously with respect to shareholders, and other stakeholders including franchisees, employees and guests. We strongly believe that Wyndham's stand-alone plan and multiple levers of growth provide a more compelling proposition compared to Choice's offer."
Holmes emphasized that Choice's proposal was unsolicited and, in his opinion, not well-thought-out.
"We weren't looking to sell the company. They called us, but they called us and they didn't have a plan. Their plan seems to be to put out repetitive press releases and see if they can turn the water enough to make it interesting for us. I just don't see that as a plan. That's a bit of a desperate plan," Holmes said.
In a release timed with Wyndham's earnings report, Choice urged Wyndham executives to return to the negotiating table. President and CEO Pat Pacious said in that release that there has been positive feedback from Wyndham shareholders and owners since the company made its bid public on Oct. 17.
The Asian American Hotel Owners Association, which represents a significant amount of franchise owners for both companies, said it was against the deal when it was first announced.
Wyndham executives countered that the company's own growth plans and prospects represent a better value and long-term returns to its franchisees and stakeholders. President and CEO Geoff Ballotti said that Wyndham's third-quarter results bear that out.
The third quarter "was a huge quarter for us, with some really, really great momentum ... in terms of brands gaining share," he said. "We're gaining on both the conversion side and the new-construction side. ... We saw great growth in our midscale [portfolio], great growth in our international direct franchising business, and our pipeline is sitting at a record level for 13 consecutive quarters and we want to keep that up. ... We don't want the distraction [of Choice's acquisition offer] that we talked about in our prepared remarks to impact it in any way."
Ballotti said that "Choice has been very open that they do not want to be in the economy space; we certainly do." He pointed to Wyndham's new extended-stay brand ECHO Suites, for which the company signed 60 new-construction contracts in the third quarter alone.
"It's just a huge, huge market. There's 9,500 branded economy hotels, There's 22,000 non-branded hotels in the economy space," he said.
Ballotti acknowledged that there are "synergies in scale" with Choice — "and M&A [mergers and acquisitions] is in our DNA" — but he and Holmes both were firm in their assessment that those synergies would be more than offset by the risks of the proposed deal.
Those risks include a likely prolonged regulatory process with the federal government, which Holmes said Choice executives finally, after many meetings, acknowledged could take at least 12 months to clear.
"They have been in denial for quite some time. And initially they didn't think the antitrust issue was even an issue. Then they came back and said well, maybe it'll take three months to clear it. And it took us many, many meetings ... for them to acknowledge that no, this can be a 12- to 18-month process," Holmes said.
"So what do you think the odds are of us getting them to understand the impact that could have on our business? They have no risk. They're playing with house money here. And frankly, they'd be playing with our money if they could get a deal done, because that's how they would finance the purchase. And we don't need them to do that," Holmes added.
Ballotti said the offer presented by Choice is opportunistic and inflated.
“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. Just last week, within a few days of Choice’s public announcement, Choice’s stock had decreased by over 9% and the implied value of the offer was already $4 lower at $86 per share,” he said.
“And it's important to note that Choice has not offered our shareholders any protection against potential continued downward volatility. Furthermore, the fixed value of the cash portion offered to our shareholders would not be realized until the conclusion of an extended regulatory process, which our advisers estimate could take 12 to 18 months. When we consider all of this, one point is clear: The actual offer is worth materially less to our shareholders if and when they receive it.”
He added that debt leverage is another factor skewing the offer, from Wyndham’s viewpoint.
“We estimate Choice would need to secure approximately $6 billion of debt to fund this transaction, including over $4 billion of incremental debt and the remainder to replace Wyndham's existing debt. Our financial advisers estimate this leverage level would take three to four years to deliver from, even if the company were to allocate nearly all of its excess cash flow towards paying down the debt and potentially longer depending on the macro environment,” he said.
Holmes said he doesn't see a path forward with the Choice proposal, but he's open to any transaction that is in the best interests of Wyndham stakeholders.
"If anybody had a great idea that they want to bring to the table, we're all ears. I mean, when I first heard from the other side, their question was, 'Are you prepared to transact?' And I said, 'Well, I'm always prepared to transact if it's in the best interest of our shareholders.' I'm transactional if that's the right thing for our shareholders. But there hasn't been anything that I consider really close to transactional," he said.
Ballotti pointed to Wyndham's high retention rate and support from owners of Wyndham-branded hotels as evidence of its favorability. He said that chatter around Choice's proposal also is not slowing down its development team or new signings of Wyndham hotels.
"Our teams were able in the third quarter to sign 10% more deals year on year with this rumor out there, and 60% more deals versus 2019," he said.
Meanwhile, Wyndham's own figures show Choice's development pipeline has declined 12% year to date and its "pipeline of RevPAR accretive brands declined 38% in 2022 versus 2019."
"It's not attractive what [Choice] is doing. ... I don't think it's very friendly. If you want a friendly deal done, you don't approach it the way they've approached it," Holmes said. "God only knows how they can get a deal through the FTC where we are not a willing participant. Yeah, I just don't get it. I don't get why they would even release this. They threatened to do it and I just thought, well, they're smarter than that. They won't do it. But they made a different decision. So it's very hard for us to say what's next. The ball is really in their court."