Wyndham Hotels & Resorts rejects $7.8B Choice Hotels takeover bid

Details of the proposal as per Choice

Under Choice's proposal, the $90.00 per share to be received by Wyndham shareholders would consist of $49.50 in cash and 0.324 shares of Choice common stock for each Wyndham share they own. Choice's proposal represents a 26 per cent premium to Wyndham's 30-day volume-weighted average closing price ending on October 16, 2023, an 11 per cent premium to Wyndham's 52-week high, and a 30 per cent premium to Wyndham's latest closing price. In addition, Choice's proposal includes a cash or stock election mechanism, which would provide Wyndham shareholders with the ability to choose either cash, stock, or a combination of cash and stock consideration, subject to a customary proration mechanism. The proposal implies a total equity value for Wyndham of approximately $7.8 billion on a fully diluted basis. With the assumption of Wyndham's net debt, the proposed transaction is valued at approximately $9.8 billion.

Wyndham has reportedly rejected the offer and disengaged from further discussions with Choice, following nearly six months of dialogue, according to a release from Choice.

Patrick Pacious, president and chief executive officer of Choice Hotels, said, "We have long respected Wyndham's business and are confident that this combination would significantly accelerate both Choice's and Wyndham's long-term organic growth strategy for the benefit of all stakeholders. For franchisees, the transaction would bring Choice's proven franchisee success system to a broader set of owners, enabling them to benefit from Choice's world-class reservation platform and proprietary technology to drive cost savings and greater investment returns. Additionally, the value-driven leisure and business traveler would benefit from the combined company's rewards program, which would be on par with the top two global hotel rewards programs, enabling them to receive greater value and access to a broader selection of options across stay occasions and price points.

"A few weeks ago, Choice and Wyndham were in a negotiable range on price and consideration, and both parties have a shared recognition of the value opportunity this potential transaction represents. We were therefore surprised and disappointed that Wyndham decided to disengage. While we would have preferred to continue discussions with Wyndham in private, following their unwillingness to proceed, we feel there is too much value for both companies' franchisees, shareholders, associates, and guests to not continue pursuing this transaction. Importantly, we remain convinced of both the many benefits of the combination and our ability to complete it," concluded Pacious.

Response from Wyndham Hotels & Resorts

Wyndham Hotels & Resorts is the world’s largest hotel franchising company with approximately 9,100 hotels spanning more than 95 countries. Wyndham’s board of directors, together with its financial and legal advisors, closely reviewed Choice’s latest proposal with a nominal value of $90 per share, comprised of 45 per cent in stock and 55 per cent in cash and determined that it is not in the best interest of shareholders to accept the proposal.

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,” said Stephen P. Holmes, chairman of the Wyndham board of directors.

“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.”

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 EBITDA. 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 has significant questions and concerns about the value of Choice’s stock. Choice’s latest offer includes 45 per cent in Choice stock, which Wyndham’s board believes is fully valued. Industry experts unequivocally share the view of Choice being fully valued, with over three-quarters of research analysts having Choice at a Sell or Hold rating. 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 per cent), 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 per cent as of June 30, 2023, 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 per cent and an increase in adjusted EBITDA of only 1 per cent, compared to Wyndham’s comparable revenue growth of 7 per cent and comparable adjusted EBITDA growth of 9 per cent.

EBITDA margin: Wyndham’s efficient operations result in an Adjusted EBITDA margin premium of ~800 basis points compared with Choice.

Free cash flow conversion: Wyndham’s more efficient 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, according to Wyndham. Choice’s offer is insufficient relative to Wyndham’s recent trading levels, significant growth momentum and premiums paid in precedent change of control transactions. 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 continues to outpace peers – up 20 per cent over the last two years – and, as of June 30, 2023, stood at an all-time high of approximately 228,000 rooms, which would contribute more than $120 million in incremental annual stabilized royalties.

Industry-leading new brands. Wyndham’s newly launched brand, ECHO Suites Extended Stay by Wyndham, has quickly established itself as the industry’s fastest-growing brand with 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 per cent over the past two years and international royalty rate growing by over 30 basis points since 2019.

Significant embedded upside from ongoing retention strategy. Wyndham’s signature owner-first philosophy and ongoing enhancements to its franchisee value proposition have resulted in its industry-leading LTM franchisee retention rate improving from 93 per cent at spin-off to over 95 per cent as of June 30, 2023 with a go-forward target of greater than 96 per cent (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 industry-leading 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.

Background on Choice proposals

On April 28, 2023, 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 per cent of the consideration in cash and the remainder in Choice stock. The Wyndham board reviewed this offer and deemed it insufficient. On May 9, 2023, the Wyndham board responded to Choice that its offer substantially undervalued Wyndham relative to its standalone prospects.

On May 15, 2023, 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 per cent of the consideration in cash and the remainder in Choice stock. On May 29, 2023, 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, 2023, 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 August 14, 2023, 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 per cent 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 August 17, 2023, 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 August 21, 2023, Choice submitted a third, written unsolicited offer to the Wyndham board, reiterating the nominal value of $90 per share verbally offered on August 14, 2023, with 55 per cent of the consideration in cash and the remainder in Choice stock. On August 22, 2023, 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 September 5, 2023, 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 2023, 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 September 27, 2023, 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 Inc. and PJT Partners are serving as financial advisors and Kirkland & Ellis LLP is legal advisor to Wyndham.

FOOTNOTES

1. Reconciliations of non-GAAP financial measures to the most-directly comparable GAAP financial measures can be found in the Appendix. Choice metrics are sourced from public filings unless stated otherwise.
2. Choice Q2 2023 room count adjusted for ~67k rooms acquired from Radisson.
3. Includes contribution from Vienna House brand acquisition, which impacts Y-o-Y growth rates by < 50 basis points.
4. Represents a comparison eliminating the contribution from Wyndham’s owned hotels and select-service management business, both of which were exited in the first half of 2022, as well as the variability in its marketing fund, which aligns with Choice’s treatment.
5. Radisson’s 1H 2023 adjusted EBITDA is calculated as assuming pro rata share of Radisson 2023E contribution of $60 – $65mm per earnings transcript based on Q2 2023 reported Choice adjusted EBITDA as a percentage of FY 2023E adjusted EBITDA guidance midpoint of $535mm.
6. Normalizes results for both companies so that the impacts from marketing, reservation and loyalty funds and owned hotels are on a comparable basis.
7. Free cash flow is calculated as net cash from operating activities less capital expenditures.
8. Domestic upscale, extended-stay and midscale segments.
9. Domestic segment only.