In a move described as “underwhelming” by Wyndham Hotels & Resorts Inc., Choice Hotels International Inc. has proposed a takeover offer that would forge a budget hotel giant. Choice is offering a combined cash and stock deal valued at approximately $9.8 billion, with each share priced at $90, representing a 30% surge from the closing stock price of Wyndham Hotels on Monday.
While discussions between the two companies regarding the potential transaction have spanned several months, Wyndham’s decision to cease negotiations prompted Choice to make the offer public. Wyndham has cited heightened regulatory risks, potential franchisee turnover, and excessive leverage as concerns surrounding the proposed deal.
In response to the offer, Wyndham’s Chairman, Stephen Holmes, stated, “Choice’s offer is underwhelming, highly conditional and subject to significant business, regulatory and execution risk.” Holmes emphasized that it appeared likely the proposed transaction would take over a year to navigate antitrust review, with uncertainties about final terms.
Following this development, Wyndham’s stock surged by 8.7% to reach $75.12, while Choice experienced a 5.5% decline, settling at $118. Choice’s stock had already seen an 11% increase since the start of the year up until Monday’s close.
Choice initially proposed the acquisition in April at $80 a share, subsequently elevating the bid to $90 per share, with 55% in cash. Choice expressed confidence that their franchisees and guests would support the merger and that regulatory approvals would be secured in due course.
Regulators have intensified efforts, particularly under President Joe Biden’s administration, to scrutinize deals deemed anticompetitive. The Federal Trade Commission, under the leadership of Lina Khan, has been particularly vocal about challenging companies hindering fair competition.
A merger between Wyndham and Choice Hotels would birth a dominant force in the budget hotel sector, boasting a collective portfolio of over 16,500 hotels spanning 46 brands. Choice’s CEO, Patrick Pacious, noted that the combination would markedly accelerate both companies’ long-term growth strategies.
The economy hotel sector emerged as a resilient performer during the pandemic, outshining higher-rated properties in terms of occupancy rates. This sector’s strong performance attracted the interest of industry titans like Marriott International Inc. and Hilton Worldwide Holdings Inc., prompting the introduction of new brands catering to lower price points.
The consolidation of Choice and Wyndham Hotels not only fortifies their stance against larger industry competitors but also promises an estimated $150 million in cost savings and revenue growth potential, as indicated by Choice.
Analyst C. Patrick Scholes from Truist acknowledged the attractiveness of Choice’s offer for WH shareholders, speculating that Wyndham’s seasoned leadership may be strategically holding out for a potentially improved offer.
The proposal comes at a time of high borrowing costs and a decelerating recovery in the U.S. lodging industry. Choice’s current proposition would likely entail an additional $4.5 billion in debt issuance, according to Baird analyst Michael Bellisario. Bellisario underscored the strategic sense behind the merger but raised questions about the heightened leverage profile and the timing of such a significant debt increase.
Source: Bloomberg
