Last week, the Board of Directors of Wyndham Hotels & Resorts received an “enhanced proposal” from Choice Hotels International on Choice’s ongoing efforts to acquire Wyndham’s business. In a statement today, the board said that together with its financial and legal advisors, it had “closely reviewed” Choice's letter and “determined that it represents a step backwards and that the terms Choice outlined are not in the best interests of Wyndham or its shareholders.”
Wyndham’s Board shared Choice’s fifth letter to Wyndham, which largely focuses on risk allocation in the context of the regulatory framework. According to that letter, which has not yet been made public by Choice, Choice’s leadership team said it was “prepared to offer ... significant protections” to address the concerns over potential regulatory uncertainty, including a reverse termination fee of $435 million, or approximately 6 percent of the total equity purchase price.
“The industrial logic of the Transaction is irrefutable, and as already discussed amongst principals and legal advisors over the past few months, this transaction is pro-competitive and the required regulatory approvals are obtainable,” Choice CEO Patrick Pacious wrote in the letter. “In addition, our franchisees, many of whom own both Wyndham and Choice brands, have instantly grasped the benefits of this combination, particularly in light of rising operational costs. This combination will drive more direct bookings, lower hotel operating costs, and create a stronger rewards program. As such, we believe now is the right time to reengage in a direct and private dialogue in order to negotiate a Transaction that is in the best interest of all our respective stakeholders.”
According to the Wall Street Journal, the latest valuation on the deal is $86 per share, down from $90 given a decline in Choice shares since the takeover offer was made public in October. Wyndham shares closed Monday at $77.95, the Journal added, for a market capitalization of $6.5 billion. Choice shares reached $113.62 on Monday evening, bringing its market value to about $5.7 billion. When news of the latest communications broke, Choice shares rose slightly in premarket trading, while Wyndham's shares dipped more than 1 percent.
Wyndham Responds
In its statement, Wyndham’s board argued that Choice's first communication in a month since the public disclosure of the proposal (which Wyndham emphasized was “unsolicited”) contains “no change to the form of consideration and continues to undervalue Wyndham's standalone growth prospects.” At Choice's current share price, the statement said, its offer to acquire all outstanding shares of Wyndham stands at $86 per share, below the nominal value of $90 per share proposed on Oct. 17, when Choice made its proposal public. The letter also proposes a two-year period for Choice to seek to obtain regulatory approvals, which Wyndham’s Board argues is supported “only by a low 6 percent reverse termination fee, which would both create a prolonged period of limbo and expose Wyndham and its shareholders to significant asymmetrical risk.”
“Choice continues to ignore our major concerns around value, consideration mix, and asymmetrical risk to our shareholders given the uncertainty around regulatory timeline and outcome,” Stephen Holmes, chairman of the Wyndham Board of Directors, said in the statement. “In addition, Choice's existing proposal is valued at $86 per share, lower than the unsolicited public proposal of $90 per share they made a month ago. Given they now explicitly acknowledge the legitimate issues around the regulatory timeline, they are essentially asking our shareholders to take on serious risk and accept as compensation for a failed deal a low reverse termination fee that doesn't even begin to compensate for the potential lost earnings and long-term impairment to value that could occur during an uncertain two-year regulatory review. In line with our fiduciary duties, we will of course always evaluate any serious proposal, but Choice continues to fail to adequately address any of the three core issues we have repeatedly raised. They have instead chosen to prolong this for months with a proposal that remains unfeasible, damaging to our business, and unnecessarily distracting to our management team.”
The Letter
Wyndham shared the full text of its letter to Choice:
Dear Stewart,
We received Pat Pacious' letter of November 14 and shared it with our Board of Directors who discussed it at a special meeting.
While you characterize the letter as your fifth, the real question is whether the letter advances the discussion. Unfortunately, this letter does not, and in fact represents a step backwards despite being delivered nearly a full month after you decided to unilaterally go public with your unsolicited proposal.
We have repeatedly articulated three primary concerns: (1) undervaluation of our superior, standalone growth prospects, (2) the value of Choice shares relative to its growth prospects and further compromised by elevated levels of leverage that this deal would require, and (3) the uncertain regulatory timeline and outcome and resulting significant asymmetrical risk to our shareholders.
Unfortunately, despite your assertion to the contrary, your letter fails to adequately address any of these concerns and therefore a combination on the terms you propose continues to not be in the best interest of Wyndham or its shareholders.
As to the first and second concerns, they are not even mentioned in your letter, let alone solved, despite your public comments that you were prepared to address them with available tools and our repeated guidance that an all-cash deal would obviate concerns about Choice's shares. Also, while you frame your proposal as being $90 per share, it is actually currently valued at $86 per share.
With respect to the regulatory issues and terms, we wanted to first address misrepresentations in your letter, as well as ones that have been raised in prior conversations:
- Neither we nor our advisors have ever described this transaction as "pro-competitive."
- Neither we nor our advisors have ever stated that clearance of the transaction is certain.
- We have repeatedly expressed our serious concerns and, if anything, they have only increased since you chose to unilaterally go public with your proposal. The reception from the Wyndham franchisee community has been unenthusiastic to say the least, as evidenced by the vehement opposition from AAHOA, which represents about two-thirds of our respective franchisees.
- With respect to the proposed terms relating to regulatory matters, while you have put some specific numbers to prior qualitative statements, they continue to fall far short of what is required to address the asymmetrical risk to Wyndham shareholders. Instead, they represent a step backwards in your position.
For the first four months of our interactions, your team repeatedly conveyed confidence that the transaction would clear regulatory approvals within 60 days. Only after repeated conversations with our advisors did your team finally acknowledge the possibility of an in-depth review and Second Request. Your stance has clearly shifted once again on this point: now, you are proposing a two-year period for you to seek to obtain regulatory approvals, which is not at all assured. This significantly exacerbates our concerns about the potential substantial damage and disruption to our business during this time. As we described in our Investor Presentation on October 26, a prolonged period of limbo exposes Wyndham 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 our fast-growing ECHO Suites brand, and challenges attracting and retaining team members, among other things. This significant value destruction will impact earnings and compound over time, and potentially cause long-term impairment to our trading multiple.
And these concerns are not merely theoretical. Since May, when your interest was leaked to the Wall Street Journal, your franchise sales team and executive leadership have been actively exploiting the uncertainty around Wyndham that you created to seek a competitive advantage in the market for franchisees and development partners. For example, your representatives have told owners and prospects that completion of the acquisition is a "100 percent certainty," in an apparent attempt to discourage them from doing business with Wyndham. While our best-in-class management team has been working actively to mitigate this threat, this risk would only grow worse in the event of a signed transaction with a possible two-year timeline.
While your proposal of a 6 percent reverse termination fee (ironically calculated off the current $86 per share value of your offer) finally quantifies your prior public comments about a "market" fee, we have consistently told you that such a fee does not even begin to compensate for the damage to our business in the event the deal does not close after an extended regulatory review, a concern made even worse by your new proposal for a 24 month drop-dead date. Given your advisor's recent characterization of your confidence level in the deal closing being "100 percent", we are deeply puzzled by your unwillingness to agree to a robust fee that protects us in circumstances that you see no chance of ever happening.
Our Board of Directors remain faithful fiduciaries representing the best interests of Wyndham and its shareholders and other stakeholders and stand ready to evaluate and engage in discussions if you make a proposal that adequately addresses each of the three significant concerns we have raised on multiple occasions. Given your persistent unwillingness to adequately and promptly address the three concerns that have been consistently communicated or to abandon your current proposal, we are compelled to make our response public as we are not prepared to expose Wyndham's business to continued uncertainty, from which you benefit competitively.
Sincerely,
Stephen P. Holmes