The gloves have come off and both Choice Hotels International and Wyndham Hotels & Resorts appear to be engaged in a brutal fight to either complete or kill the unsolicited acquisition offer that has been making headlines since last week. In competing statements, Choice outlined reasons why its offer to acquire Wyndham would be beneficial for both businesses while Wyndham used its Q3 earnings call to detail why the offer is insufficient.
Choice’s Argument
Just as Wyndham released its third-quarter numbers yesterday, Choice issued a statement calling upon Wyndham’s board 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 President and CEO Patrick Pacious said in the statement. “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.”
The transaction, he continued, would be “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."
While Pacious said the Choice team understands Wyndham's goal to support its stakeholders, he argued that this can’t happen if Wyndham “unilaterally” ends the 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.”
The proposal of $90 per share, which the statement described as “compelling,” represents a 14.9x multiple of Wyndham's consensus 2023 estimates for earnings before interest, taxes, depreciation or amortization. The statement argued that Wyndham has “never achieved” a forward multiple like this absent COVID disruptions. “Furthermore, the consideration mix would allow Wyndham shareholders to both realize immediate value creation and share in the significant upside potential of the combined company. The $150 million synergy opportunity alone is expected to translate into more than $2 billion in shareholder value creation.”
Choice argued that the combined company would “enhance competition against larger industry participants” with an established market presence across multiple segments. “Many of these competitors have launched brands focused on the economy and midscale segments and are actively marketing to hotel owners in those segments,” the statement claimed. “Large, branded alternatives for hotel owners and guests are already present across the economy and midscale segments, including Best Western, Extended Stay America, G6 (Motel 6), Oyo, Red Roof Inn and Sonesta, which would continue to provide multiple options to both current franchisees or hotel owners considering adopting a brand. Many hotel owners choose to be independent and in fact, independent hotels comprise nearly two-thirds of the Economy segment and close to 40 percent of the midscale segment.
Wyndham’s Rebuttal
During Wyndham’s Q3 earnings call with investors, the company’s leaders came out swinging against the deal, releasing a presentation detailing why they felt it was not beneficial to the business or its shareholders.
Stephen Holmes, chairman of Wyndham’s board of directors, argued that Choice’s platform offers “no organic growth, a less vibrant loyalty program and virtually no international capabilities,” whereas Wyndham’s platform “offers a medicine cabinet full of remedies.”
President and CEO Geoff Ballotti highlighted Wyndham’s own accomplishments since its spinoff from Wyndham Worldwide, including 11 consecutive quarters of organic net rooms growth, 13 consecutive quarters of pipeline growth and the launch of four new brands. Echo Suites is one of the newest brands, with 265 deals signed since it was announced. “We have multiple levers to accelerate net room growth from the current 2 to 4 percent to 3 to 5 percent,” he said.
Ballotti also outlined financial reasons for declining the bid. While the offer may have had an initial headline of $90 per share, he said, the proposal is now worth less and could 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 percent and the implied value of the offer was already $4 lower at $86 per share,” Ballotti said.
Choice also did not offer Wyndham’s shareholders any protection against “potential continued downward volatility,” he added. “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 advisors estimate could take 12 to 18 months.
“When we consider all of this, one point is clear,” Ballotti continued. “The actual offer is worth materially less to our shareholders—if and when they receive it.”
On its own, Wyndham is “pursuing several initiatives” that Ballotti predicted would “significantly enhance” shareholder value. “Combined, these opportunities set up an achievable path to accelerate organic EBITDA growth to a seven to 10 percent compounded annual growth rate through 2026.”
Choice, Ballotti claimed, has used mergers and acquisitions to “mask its lack of organic growth.” Last year’s $675 million acquisition of the rights to use the Radisson brand in the Americas “accounted for the entirety of the reported system growth since the transaction closed in August of 2022," he added.
While Wyndham grew its net rooms by 3 percent organically in the first half of 2023, Choice’s system declined by two percent, Ballotti said. “Wyndham grew first half 2023 EBITDA 9 percent organically while Choice’s organic EBITDA growth was 1 percent.” He described Choice’s future growth prospects “equally challenged” given the company’s “declining pipeline,” which he said had contracted by 12 percent year to date through June.
“We weren't looking to sell the company,” Holmes emphasized to investors during the call. “They called us and they don't have a plan. So their plan seems to be to put out repetitive press releases and see if they can churn the water enough to make it interesting for us.”
Holmes expressed surprise at Choice’s decision to take the bid public and put it before the shareholders. “I don't get why they would even release this,” he said. “When they threatened to do it, I just thought, ‘well, they're smarter than that. They won't do it.’ But they made a different decision.” As the arguments continue, Holmes said it was hard for the Wyndham team to say “no” more than they already have. “Really, they have to decide that they want to lay down their pen and their PR machine and let's all get back to business. We can't force that to happen.”
Choice is set to hold its earnings call on Nov. 7, and almost certainly will issue a rebuttal at that time or beforehand.