While Choice Hotels International takes steps to acquire more shares of Wyndham Hotels & Resorts and to get its own directors onto Wyndham’s Board, the New Jersey-based hotel company is continuing its fight for independence. Today, the company’s Board of Directors, following a “comprehensive review” with its outside financial and legal advisors, “unanimously determined” that Choice’s unsolicited exchange offer to acquire all outstanding shares of Wyndham is not in the best interests of Wyndham and its shareholders. 

The Wyndham Board of Directors also unanimously recommended that shareholders not tender any of their shares into the offer.

“Choice has, once again, failed to address the major value gap and risks of their offer—which remains virtually unchanged from the terms outlined in their previous unsolicited proposal,” Stephen P. Holmes, chairman of Wyndham’s Board, said in a statement. “The core issues we have articulated remain the same: a likely prolonged regulatory review period of up to 24 months with an uncertain outcome; the pure inadequacy of the offer from a valuation standpoint, including the significant equity component of Choice stock; and the lack of consideration for Wyndham’s superior, standalone growth prospects.

“Our Board has made itself consistently clear on these risks, but Choice continues to ignore what is in the best interests of Wyndham shareholders by repeatedly proposing illusory and unrealistic offers while making inconsistent and misleading public statements,” Holmes continued. “We are confident Wyndham can deliver long-term shareholder value well in excess of the $85 per share offered by Choice by continuing to execute on our existing business plan. The Board is steadfast in our recommendation that shareholders not tender their shares into this offer, and we remain fully committed to acting in the best interests of all Wyndham shareholders.”

AAHOA Responds

Wyndham’s Board isn’t the only group expressing concern. According to Reuters, AAHOA recently surveyed 1,000 of its 20,000 members to gauge sentiment on the potential merger. About 80 percent of Wyndham franchisee respondents said a tie-up would hurt their business and about 60 percent said they would terminate their contract in the event of a merger if they had the option. AAHOA members own about 60 percent of the hotels in the United States.

AAHOA CEO Laura Lee Blake told Reuters that “many” AAHOA members reported a drop in revenue after previous mergers, including the 2018 combination of Wyndham and La Quinta and Choice's acquisition of Radisson Hotels Americas in 2022. Members are also worried about increased fees and brand dilution, she said.

To balance Choice’s pro-acquisition website, Wyndham has launched its own page that includes a presentation detailing the “unprecedented antitrust risks” the Board feels that Choice’s offer presents. 

Wyndham’s Reasons

Following a “comprehensive review” of Choice’s offer, Wyndham’s Board of Directors recommended shareholders reject the offer for the following reasons:

The offer involves an uncertain regulatory timeline and outcome and does not provide sufficient protections and compensation for the asymmetrical risks Wyndham shareholders would face. Choice’s offer would create the largest U.S. provider of hotel franchise services in the chainscales that serve middle-income guests—economy and midscale—with over 55 percent market share in each, resulting in significant uncertainty as to whether the FTC or courts would ever clear the transaction.

The merger would require an extended period of time to review relative to businesses that are smaller in scope, scale or competitive intensity. Choice noted that the FTC has opened a preliminary investigation into the transaction—even before there was an exchange offer or transaction—which it noted as additional evidence of antitrust concerns and a potential prolonged review process.

Any extended period between the announcement and closing (or termination) of the transaction exposes Wyndham and its shareholders to meaningful risks, including:

  • New business development disruption and deterioration in segment-leading retention rates resulting in impaired earnings growth;
  • Competitors (including Choice) capitalizing on franchisee uncertainty;
  • Stagnated development of Wyndham’s fast-growing ECHO Suites brand; and
  • Increased employee turnover and reduced ability to attract and retain team members.

Franchisees, the company claimed, have “vehemently” expressed their opposition to a proposed transaction, and the reception from franchisees has been “extremely negative.” The Board expressed concern that the announcement of a transaction could result in increased franchisee churn and reduced new development activity.

The Board also claimed that the offer is inadequate and undervalues Wyndham’s “superior, standalone growth prospects.” The Board believes the company can “deliver long-term shareholder value in excess of the $85 per share offered by Choice by continuing to execute on its existing business plan,” and that Wyndham has “significant embedded upside” from its ongoing retention strategy. Wyndham’s pipeline provides additional opportunity for accelerated net room growth, above-market growth in revenue per available room and royalty-rate expansion, the Board claimed.

Wyndham’s geographic domestic footprint is “best positioned to capture unprecedented hotel demand in markets receiving the largest allocation of the Federal Government’s $1.5 trillion Infrastructure Bill,” the Board claimed, and the new Echo Suites brand will appeal to this infrastructure demand. Wyndham also expects to benefit from ancillary revenue growth including new credit-card products, new strategic marketing partnerships and other monetization opportunities.

The Board also argued that Choice’s offer mischaracterizes Wyndham’s growth potential, portraying that potential at $9 per share—an “egregious mischaracterization” that “fails to reflect the outlook Wyndham provided in its October investor presentation, which provides the roadmap for an incremental $20 per share from [earnings before interest, taxes, depreciation or amortization] growth potential over the next two years with an additional $16 per share from the deployment of available capital during that period.”

The standalone plan, the Board argued, does not rely on overleveraging Wyndham’s balance sheet. “Rather, Wyndham’s plan can be achieved with leverage remaining in the lower half of Wyndham’s stated target range at 3.5x.” The Board also noted a further upside from continued multiple expansion: “Since completing its spin-off in 2018, Wyndham’s multiple has expanded and continues to close the gap to its peer set average, which currently stands at 15.7 times. Every 1.0x multiple increase could translate into as much as $8 per share of additional value.” Choice’s offer, meanwhile, represents “a mere 4 percent premium” to Wyndham’s 52-week high and a 10 percent premium to Wyndham’s current stock price (as of December 15).

Since the announcement of Choice’s proposal on October 17, Wyndham’s share price has recovered to 95 percent of its 52-week high, which is generally consistent with the broader lodging sector performance of 99 percent.

The Board argued that Choice’s stock is at “significant risk” for further price degradation, with a “slower-growing” business. Post-transaction, Choice’s leverage level would surpass all other lodging peers’ average leverage ratios—negatively affecting not only the value of the equity consideration in the offer, but also limiting Choice’s ability to invest in future growth.

The Wyndham Board described the offer as “an attempt by Choice to mask its anemic organic growth by acquiring Wyndham’s global system and capabilities without paying adequate consideration for it to Wyndham shareholders.” The 45 percent stock component is subject to volatility, the argument continued, and exposes Wyndham shareholders to “excessive risks” with respect to the value of the consideration received. Choice stock has already dropped 12 percent since its initial public offer, the statement noted, and faces “significant risk for further degradation,” with approximately 70 percent of covering research analysts rating Choice as a “sell” or “hold” stock. More than 90 percent of covering analysts rate Wyndham as a “buy,” the Board claimed

The offer is subject to a “litany” of conditions that make the consummation “highly uncertain.” The Board also emphasized that Choice has not arranged committed financing despite “numerous calls with potential financing sources” (according to its own statements) for more than four months. The offer includes a non-customary “Diligence Condition,” which the Wyndham Board believes is designed solely to serve as a one-way exit option to the offer in favor of Choice.

Deutsche Bank Securities and PJT Partners are financial advisors and Kirkland & Ellis and Arnold & Porter Kaye Scholer are legal advisors to Wyndham.

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