Last week’s announcement that Choice Hotels International was looking to acquire Wyndham Hotels & Resorts set off a substantial buzz across the industry, with insiders weighing the pros and cons of a merger for shareholders, owners and operators alike.
High Concern
AAHOA, which has nearly 20,000 members owning more than 60 percent of all hotels in the country, issued a statement expressing “high concern” about the deal, noting that a merged company would have 16,500 hotels with 46 brands dominating the economy and limited-service segments of the industry.
“As the owners of more than two-thirds of both Choice Hotels and Wyndham-branded hotels, AAHOA members have much at stake with Choice’s potential purchase of Wyndham,” AAHOA Chairman Bharat Patel said in the statement. “To have one franchisor—Choice Hotels—control so many economy and limited service hotels will give our members little opportunity to have a say in whether the franchise mandates and requirements are fair, and significantly limit their options to find a different brand under which they could successfully operate their hotels.”
AAHOA President and CEO Laura Lee Blake noted the “major impact” that mergers and acquisitions by hotel franchising corporations can have on the association’s members. “Our AAHOA members fear a significant further dilution of the brands, and fighting over the guest reservations on one reservation system,” she said. “The changes can be highly disruptive to their business practices, and even cause a significant decrease in revenues overall.”
Mixed Feelings
Rupesh Patel, CEO of State Hospitality, is a Choice franchisee and recently sold a Wyndham property. Talking with Hotel Management, Patel said that he, and “most owners,” have mixed feelings about the deal. “I think it'd be good for the brand and could be good for shareholders if you own shares of either company,” he said. On the other hand, bringing so many hotels and brands under one umbrella could present challenges for crowded markets. “Are we going to lose business because of our [external] competition now being our direct competition within the brand?” he asked.
Owners, Patel noted, try to put their properties into markets where they have a competitive advantage. “When a brand doubles their size because of a merger, you would really consider, ‘is this the best and highest value for my property?’ … When you're resigning your franchise agreements, I would think there [are] a lot of different things to consider.”
Ed James, managing principal of commercial real estate company Mumford Company, echoed the sentiment: “From a broker's perspective, having the appropriate brand availability for the subject property is critical to a successful transaction,” he said, noting that branding can “dramatically improve” a property’s value and increase the likelihood of more profitable operation after the sale. “Choice and Wyndham each already own incredibly successful brands across much of the existing mid-market, limited-service and full service segments of our business and are both leaders in the economy extended-stay segment of the business. Those flags will remain available to our buyers thus we would not expect any significant changes to transaction volume should Choice and Wyndham merge.”
On his LinkedIn profile, Patel encouraged other industry insiders to discuss the pros and cons of the deal.
Neil Patel, AAHOA director at large - Western Division and operator of DNA Hotels, emphatically declared that the deal would not be good for the industry. “Creating a monopoly in the midscale market and economy segment is not good for consumers,” he wrote. “History has shown franchisees [lose] bottom line with added fees and mandated vendors. Vendors will be dictated to for products that cost cheaper and sell at a higher price for [revenue] share.”
Luis Riestra, managing director with online marketing firm HOSofT Developments, suggested that a single entity overseeing 10,000 to 15,000 properties would not be able to keep standards high. “The bigger the boat, the faster it sinks,” he cautioned.
Dollars and Sense
In an alert released right after the proposed acquisition was announced, Robert W. Baird & Co. suggested the merger “makes long-term sense.” Michael Bellisario, director, senior research analyst for hotels: global brands and real estate at Baird Equity Research, said that this viewpoint reflects several factors. “[It] relates to the benefits of size, scale, distribution, being able to leverage the platform, the cost of the business [and the ability to] negotiate better deals on behalf of franchisees—for example, with various vendors [and] OTA agreements,” he said.
Baird also calculated approximately $4.5 billion of incremental debt issuance would be needed for the deal (including estimated transaction costs), assuming all of Wyndham’s debt would be assumed—“Which we know is not true,” Bellisario added. “So Choice is going to have to raise over $5 billion of debt. That is expensive, and probably a big, heavy lift in today's environment.” That debt, he added, “really impacts” the financial accretion/dilution math on the potential transaction, “because the cost of debt is elevated.”
If the deal goes through, Bellisario agreed that Choice would control a “significant portion” of the economy segment of the chain scale, but also noted Hilton’s expansion into the segment with the recent launch of its Spark brand. “You have Best Western, you have IHG brands, Red Roof Inn, Motel 6, Extended Stay America—the list is long,” he said of the competition that would remain.
Like Blake, Bellisario highlighted other headline-making mergers in recent years, but had a different perspective on the issue: “We've seen the benefits of scale for Marriott and Starwood following their merger in 2016,” he said. “The business is scalable, and the bigger the platform, the better it is for all constituents involved.”
At the same time, Bellisario noted that shareholders in the publicly traded companies might well have very different viewpoints on the issue than owners, operators and hotel teams. “The shareholder is not thinking about 10 years down the road and the benefits of size and scale and the system being much bigger,” he said. “They're looking out one year, two years at most [and] very rarely three years. They're not thinking about what the franchisee wants or cares about necessarily, or what's going to happen to the management team, etc. It's really a dollars-and-cents decision.”
At the end of the day, Bellisario said, shareholders do care about what franchisees think and do. “If there are no franchisees, the shareholders aren't happy.”