Choice Wants To Acquire Wyndham In Hostile Takeover

In mid-October 2023, Choice proposed acquiring Wyndham. Wyndham’s board rejected this takeover attempt, so Choice is now attempting a hostile takeover, including buying outstanding shares of Wyndham and trying to appoint someone to the company’s board.

Details of Choice’s proposal to buy Wyndham

Choice Hotels International has proposed acquiring all outstanding shares of Wyndham Hotels & Resorts, at a price of $90 per share, payable in a mix of cash and stocks. For context, Choice is a hotel group with 7,500 properties, while Wyndham has 9,100 properties, so a combined hotel group would have a staggering 16,600 hotels. Both companies are primarily focused on the budget market.

Under Choice’s proposal, the $90 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. This 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 transaction is valued at approximately $9.8 billion.

This proposal represents a 26% premium to Wyndham’s 30-day volume-weighted average closing price ending on October 16, 2023, an 11% premium to Wyndham’s 52-week high, and a 30% premium to Wyndham’s closing price on October 16, 2023 (the day before the proposal was first announced).

Since early 2023, the two budget hotel giants have been in talks about a possible acquisition. However, Wyndham’s management chose to disengage in these discussions. This continued even after Choice went public with the proposal, which is why Choice is now attempting a full-on hostile takeover. Choice has shared the following details about the negotiations that had been taking place:

• In April 2023, Choice proposed acquiring Wyndham for $80 per share, including 40% cash and 60% Choice stock; Wyndham rejected the proposal, and refused to engage further
• In the weeks following, Choice increased its offer to $85 per share, comprised of 55% cash and 45% Choice stock
• After that, Choice improved its offer yet again with a best and final offer of $90 per share, comprised of 55% cash and 45% Choice stock
• Wyndham raised questions regarding the value of Choice stock and timing for obtaining regulatory approval, and Wyndham fully ended discussions at that point

At this point, Choice has revealed that it holds approximately 1.5 million shares of Wyndham common stock, valued in excess of $110 million. Choice is now preparing to nominate candidates to Wyndham’s board. Choice claims to have made a variety of concessions to create certainty for Wyndham shareholders, including:

• A reverse termination fee of $435 million, which represents approximately 6% of the total equity purchase price, payable in the event the transaction doesn’t close due to regulatory reasons
• A regulatory ticking fee of 0.5% of the total equity purchase price per month, accruing daily after the one-year anniversary of the signing of a definitive agreement
• A mutual non-disclosure agreement, to allow the parties to conduct confirmatory due diligence
• A commitment to taking all actions required by regulators in connection with the approval of the transaction, as long as such actions wouldn’t have a material adverse effect on the combined company

Here’s how Choice Hotels CEO Patrick Pacious describes this takeover attempt:

“While we would have preferred to come to a negotiated agreement, the Wyndham Board’s refusal to explore a transaction has left us with no choice but to take our proposal directly to Wyndham’s shareholders. Wyndham chose to publicly reject our last proposal without any engagement even after we addressed their concerns, including adding significant regulatory protections for their shareholders.” 

“It remains our goal to reach a mutually agreeable transaction, and there is potential for additional value to be unlocked if Wyndham were to return to the negotiating table and provide due diligence. We look forward to meeting with Wyndham’s shareholders in the days and weeks ahead and to continuing the regulatory approval process we’re starting this week.”

The value in a Choice & Wyndham merger

Choice is arguing that this proposal provides important benefits for stakeholders of both companies, including franchisees, shareholders, employees, and guests. Let me share the points that Choice is making (I’m not sure I agree with all the conclusions, but…).

Choice argues that franchisees win with lower total cost of ownership and increased hotel profitability:

• Capitalizes on Choice’s proven franchisee success system, dedicated to driving incremental topline reservation delivery to hotel owners’ properties, while lowering the total cost of hotel operations
• Nearly doubles the resources available to spend on marketing and driving direct bookings to franchisees’ hotels, lowering the cost of customer acquisition
• Establishes an even larger rewards member base on par with the top two global programs in hospitality
• Drives more business to franchisees through lower cost direct booking channels, lower customer acquisition commissions and fees, and lower hotel operating costs and technology-driven labor efficiencies, while continuing to determine their own commercial and pricing strategy
• Improves the value of franchisees’ real estate assets by enhancing applicable cap rates and cash flows resulting from affiliation with the proforma company
• Reduces friction by offering guests a broad portfolio of brands across segments, no matter their stay occasions, within a single system
• Promotes increased investment and innovation in proprietary technology systems, processes, and training at the hotel and corporate level, which drives returns for Choice franchisees
• Creates an opportunity to replicate the tremendous success of Choice’s recent acquisition of Radisson Hotel Group Americas; during the integration of the nearly 600 Radisson Americas hotels into the Choice platform, Radisson’s franchisees have already meaningfully benefited from increased guest traffic to direct and digital channels, improvement in conversion rates, and access to more corporate accounts, among other benefits

Choice argues that shareholders win with superior value creation:

• Represents a 26% premium to Wyndham’s 30-day volume-weighted average closing price ending on October 16, 2023, an 11% premium to the 52-week high, and a 30% premium to the latest closing price
• Anticipates meaningful annual run-rate synergies, estimated at approximately $150 million, through the rationalization of operational redundancies, duplicate public company costs, and topline growth potential
• Enables Wyndham shareholders to benefit from Choice’s historically 3x higher EBITDA multiple on a go-forward basis and receive deferred tax treatment on their stock consideration
• Creates additional capacity to further support Choice’s revenue intense strategy, ultimately helping drive growth across its organic revenue levers
• Generates predictable high free cash flow through an asset-light, fee-for-service model, providing resiliency through all economic cycles and enabling additional investments for future growth
• Offers Wyndham two seats on the combined company’s board and Wyndham shareholders the opportunity to participate in the significant upside potential of the combined company
• Cash/stock consideration mechanism enables Wyndham shareholders to choose between immediate upfront proceeds or long-term value creation, subject to a customary proration mechanism

Choice argues that guests win with more lodging options and value:

• Creates a combined rewards program on par with the top two global programs in hospitality and will offer best-in-class program benefits through partnerships and compelling hotel redemption options
• Builds a global network of brands and hotels that meets the needs of the value-driven traveler across geographies, stay occasions and price points, supported by a seamless reservation system that provides guests with a more effective and efficient booking and shopping experience
• Improves data analytics, enabling the combined company to personalize communications and tailor recommendations to best meet the needs of the up to 160 million combined rewards program members

Choice argues that employees win with expanded opportunities and increased stability:

• Offers the ability to retain and attract “best-in-class” talent to one of the world’s premier hotel companies focused on employee well-being, bringing together a wide range of experience and deep industry expertise
• Provides more opportunities for advancement and career growth as part of a larger, more diversified organization
• Combines two performance-driven cultures with a continued emphasis on associate development and growth

My take on Choice acquiring Wyndham

Choice acquiring Wyndham would create by far the world’s largest hotel group in terms of number of properties (though not necessarily in terms of number of rooms). In the economy and midscale market in the United States, the combined hotel group would have roughly 50% market share, which is unheard of.

Along those lines, I have a couple of thoughts, as we look at the details of this proposal.

First of all, I can’t help but wonder if Choice may receive pushback from regulators regarding this, as we’ve seen the Biden Administration try to block mergers in some other industries (like trying to block JetBlue’s takeover of Spirit).

Admittedly hotel groups merging is different than airlines merging. Individual hotels still have to compete with one another, even if they’re managed or franchised by the same company. Still, Choice has already bought Radisson Americas, and now wants to consolidate even further, and could get around 50% market share in its segment. I have to imagine there will be pushback here.

The other thing is that I don’t actually fully see the merit to this takeover, other than short term stock gains for investors, and general synergies? Isn’t the whole point of the major hotel groups and major hotel loyalty programs to compete with one another, and to give guests an incentive to stay with them over a competitor?

When you suddenly have dozens of limited service brands in one city all belonging to the same hotel group going after the same consumers, that seems to me like it would be bad for individual property owners, rather than good.

We’ve seen so much hotel brand inflation over the years (where hotels create more and more brands), and then on top of that you see mergers, causing some hotel groups to have brands that duplicate one another.

Bottom line

Choice has proposed acquiring Wyndham for $90 per share. Wyndham’s management isn’t receptive to a takeover, so Choice is now going directly to shareholders, in hopes of them approving the deal. Choice has already been growing, with its recent acquisition of Radisson Hotel Group Americas, and this would now make the hotel group even bigger.

I’m curious to see how this plays out, especially with Wyndham management so vehemently opposed to the takeover, and with potential regulatory challenges.

What do you make of Choice attempting to acquire Wyndham? Do you see this getting regulatory pushback?