As noted in May, if the board of directors at Wyndham Hotels & Resorts declined an acquisition bid from Choice Hotels International, the Choice team could “choose to go hostile” and take an offer directly to Wyndham's shareholders. That’s exactly what happened this morning, when Choice launched a website listing the reasons why a takeover would be beneficial to both parties.
In response, Wyndham’s board released a statement detailing why they unanimously rejected the “highly conditional, unsolicited stock-and-cash proposal” from Choice to acquire all outstanding shares of Wyndham.
In a statement from Wyndham, the company said that its board, together with its financial and legal advisors, “closely reviewed” Choice's latest proposal with a nominal value of $90 per share—comprised of 45 percent in stock and 55 percent in cash—and determined that it is not in the best interest of shareholders to accept the proposal.
According to a statement from the company, in rejecting Choice's proposal, the Wyndham board of directors determined that:
- The proposed transaction involves significant business and execution risks, including an extended regulatory timeline and uncertainty of outcome, potential franchisee churn, and excessive leverage levels at the pro forma combined company
- The consideration mix includes a significant component of Choice stock, which the board believes is fully valued relative to Choice's growth prospects, especially when compared to Wyndham
- The offer is opportunistic and undervalues Wyndham's future growth potential
"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," Stephen Holmes, chairman of the Wyndham board of directors, said in a statement. "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."
The Board Speaks Out
Wyndham's board believes that during the long period between announcement and closing or termination of the transaction, Wyndham shareholders would be exposed to the threat of significant long-term deterioration of Wyndham's brand equity, franchisee churn and impaired integration execution at the combined company in which Wyndham shareholders would have significant interest.
In addition, the significant amount of debt required to fund the cash portion of the deal would result in the combined company's net leverage being over 6x adjusted earnings before interest, taxes, depreciation and amortization. This above-market leverage would increase execution risk and restrict the balance sheet flexibility of the combined company, putting downward pressure on future growth potential, share price and valuation multiples. As a result, the value creation from cost synergies may not be fully realized.
Wyndham's board also noted "significant questions and concerns" about the value of Choice's stock. According to the statement, Choice's latest offer includes 45 percent in Choice stock, which Wyndham's board believes is fully valued. Choice is a "fully valued" company, with more than three-quarters of research analysts having Choice at a Sell or Hold rating, the board noted. Wyndham's board sees Choice's offer as an attempt to mask their anemic organic growth and believes Wyndham shareholders are better positioned owning Wyndham's stock, which has "significant upside" relative to Choice's fully valued stock:
- Net room growth: Excluding the Radisson acquisition, Choice's organic total net rooms actually declined year-over-year by (2 percent), implying negative organic growth across Choice's broader brand portfolio for the seventh consecutive quarter. In contrast, Wyndham's organic total year-over-year net room growth was +3 percent as of June 30, which marks the seventh consecutive quarter of positive net room growth.
- Revenue and EBITDA growth: After adjusting for the Radisson acquisition, the organic Choice business displayed 1H 2023 growth in revenue of 0 percent and an increase in adjusted EBITDA of only 1 percent, compared to Wyndham's comparable revenue growth of 7 percent and comparable adjusted EBITDA growth of 9 percent.
- EBITDA margin: Wyndham's operations result in an adjusted EBITDA margin premium of ~800 basis points compared with Choice.
- Free cash flow conversion: Wyndham's business model results in significantly higher free cash flow conversion than Choice's.
"Choice's offer is an opportunistic attempt to take advantage of point-in-time stock price fluctuations coinciding with a time period where the exchange ratio is favorable to Choice," the statement continued. "Choice's offer is insufficient relative to Wyndham's recent trading levels, significant growth momentum and premiums paid in precedent change of control transactions."
Furthermore, Wyndham's board believes Wyndham can deliver long-term shareholder value in excess of Choice's offer by continuing to execute on its business plan:
- Consistent net room growth. Wyndham has reported seven consecutive quarters of positive net room growth and anticipates continued strong system growth going forward that will continue to provide significant upside to adjusted EBITDA.
- Rapidly growing pipeline. Wyndham's hotel development pipeline growth reportedly is up 20 percent over the last two years and, as of June 30, stood at an all-time high of approximately 228,000 rooms, which would contribute more than $120 million in incremental annual stabilized royalties.
- New brands. Wyndham's newly launched brand, ECHO Suites Extended Stay by Wyndham, has 265 contracts signed since its launch in March 2022.
- International presence and growth. Wyndham's global brand recognition presents significant upside growth potential in contrast to Choice's predominantly domestic portfolio. With more than 3,000 hotels in over 95 countries, the international segment experienced strong growth with system size increasing by 7 percent over the past two years and international royalty rate growing by over 30 basis points since 2019.
- Significant embedded upside from ongoing retention strategy. Enhancements to Wyndham's franchisee value proposition have resulted in its franchisee retention rate improving from 93 percent at spin-off to over 95 percent as of June 30, with a go-forward target of greater than 96 percent (with each percentage point increase resulting in ~$4.7 million of incremental royalties and ~$3.9 million of incremental adjusted EBITDA).
- Geographic footprint and value proposition align with prevailing secular growth trends. Wyndham's domestic footprint is expected to disproportionately benefit from $1.5 trillion Infrastructure Investment and Jobs Act and CHIPS and Science Act spending based on a significant overlap with allocated spend markets, resulting in incremental royalties of more than $150 million over the next eight years.
The Timeline
Wyndham's board also shared a timeline of the negotiation:
On April 28, Choice submitted to the Wyndham board an unsolicited offer to acquire Wyndham for a nominal value of $80 per share at the time of the offer, with 40 percent of the consideration in cash and the remainder in Choice stock. The Wyndham board reviewed this offer and deemed it insufficient. On May 9, the Wyndham board responded to Choice that its offer substantially undervalued Wyndham relative to its standalone prospects.
On May 15, Choice submitted a second unsolicited offer to the Wyndham board for a nominal value of $85 per share at the time of the offer, with 55 percent of the consideration in cash and the remainder in Choice stock. On May 29, the Wyndham board responded to this revised proposal with its conclusion that the proposal continues to substantially undervalue Wyndham and puts the value of a combined company at risk given the high level of contemplated debt.
On June 22, Wyndham's Chairman and CEO met with Choice's Chairman and CEO in person to explain Wyndham's concerns about Choice's proposal, including the regulatory risks.
On Aug. 14, Choice's Chairman called Wyndham's Chairman and provided a third unsolicited verbal offer for a nominal value of $90 per share at the time of the offer, with 55 percent of the consideration in cash and the remainder in Choice stock, with most of the increase in nominal value from the prior $85 per share offer coming from upward movement in Choice's share price during the intervening period.
On Aug. 17, Wyndham's Chairman met with Choice's Chairman in person to again explain Wyndham's concerns about Choice's proposal, including the regulatory risks, none of which were addressed in Choice's latest proposal.
On Aug. 21, Choice submitted a third, written unsolicited offer to the Wyndham board, reiterating the nominal value of $90 per share verbally offered on August 14, with 55 percent of the consideration in cash and the remainder in Choice stock. On Aug. 22, the Wyndham board responded to this revised proposal with its conclusion that the proposal continues to substantially undervalue Wyndham relative to its future growth prospects, includes a substantial stock component which the board believes is fully valued relative to Choice's growth prospects, and involves significant business and execution risks for Wyndham shareholders.
Wyndham offered to enter into a customary mutual confidentiality agreement to facilitate discussions around the proposed transaction and the related risks. Choice refused to sign a mutual confidentiality agreement, thereby limiting the extent of engagement between the parties.
On Sept. 5, Wyndham's Chairman held a telephonic meeting with Choice's Chairman to again discuss Wyndham's concerns about Choice's proposal, but those issues remain unaddressed by Choice as of today.
During the course of September, 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.
As a result, on Sept. 27, Wyndham's Chairman informed Choice's Chairman of the Wyndham board's decision to reject the Choice offer and the reasons for that determination.
Deutsche Bank Securities and PJT Partners are serving as financial advisors and Kirkland & Ellis is legal advisor to Wyndham. Wyndham has approximately 9,100 hotels worldwide.