Choice wants to reengage; Wyndham further outlines strong objections

Choice Hotels International on Wednesday called upon the board of directors of Wyndham Hotels & Resorts to engage in good faith discussions to work out a deal for the proposed $90 per share acquisition.

This comes about a week after Wyndham rejected Choice’s $7.8 billion acquisition offer, calling it “underwhelming” and citing regulatory risks around a potential deal. On Thursday morning, Wyndham further rejected the Choice offer and put out a presentation outlining its reasons.

“We appreciate the positive feedback we have received since first making our proposal public, particularly the support from both companies’ shareholders and franchisees,” stated Choice President and CEO Patrick Pacious. “Through our conversations with these stakeholders, we are encouraged by their clear understanding of the natural fit of the two businesses and belief in the combined company’s ability to drive greater shareholder returns, franchisee profitability, and strategic benefits. They, and others, share our perspective that a transaction is pro-competitive, has a clear path to completion, and creates a combined company with a strong free cash flow profile to support both rapid deleveraging and investments for growth.”

Pacious continued, “We respect Wyndham’s desire to achieve the best outcome for its shareholders, but that can’t happen if Wyndham unilaterally ends our discussions. Both companies’ shareholders have expressed to us their understanding of the tremendous value this combination could deliver. As recently as a few weeks ago, Wyndham prepared a critical information request list, on which both parties broadly aligned, to help Choice and Wyndham close any remaining value gaps. Wyndham then disengaged before any information was exchanged. We therefore strongly urge Wyndham to return to the discussions. Choice is ready to move expeditiously to negotiate binding terms, including mechanisms to provide market standard protections for Wyndham shareholders.”

Choice stated that its proposal of $90.00 per share represents a 14.9x multiple of Wyndham’s consensus 2023 EBITDA estimates, a forward multiple that Wyndham has never achieved absent COVID disruptions. Furthermore, Choice said the consideration mix would allow Wyndham shareholders to both realize immediate value creation and share in the significant upside potential of the combined company. The $150 million synergy opportunity alone is expected to translate into more than $2 billion in shareholder value creation.

Just as Wyndham was about to start its earnings conference call it released a statement explaining its ongoing rejection of the Choice offer. It highlighted the following: 

Uncertain regulatory timeline and outcome presents vastly asymmetrical risk for Wyndham shareholders without appropriate protections and compensation

• Despite multiple requests, Choice has not offered solutions addressing the significant risks posed to Wyndham and our shareholders. Subject matter experts on both sides have acknowledged the combination would be subject to FTC second round review, which typically takes 12 to 18 months, and could pose significant business risk.
• We have also heard from franchisees regarding their concerns about losing Wyndham’s owner-first philosophy.

Choice’s offer exploits timing and undervalues Wyndham’s superior, standalone growth prospects

• Choice’s offer is an opportunistic attempt to take advantage of point-in-time stock price fluctuations.
• Industry research analysts overwhelmingly believe Wyndham is undervalued and has significant upside.
• With a strong track record of delivering results and a clear plan in plan, Wyndham is poised to accelerate growth.

Choice’s slower-growing business and post-transaction, higher leverage negatively affects equity consideration

• Wyndham’s Board has serious concerns over Choice's organic growth prospects and those concerns are exacerbated if the pro-forma company will be left with an over-levered balance sheet that constrains its capital allocation strategy in a material way, further limiting its growth opportunities.

Throughout Wyndham's Q3 conference call, they dove deeper into reasons why the deal is going no where, starting with a comment from Chairman Stephen Holmes. "As all of you are aware, last week, Choice Hotels announced that they made unsolicited overtures to acquire our business. With no organic growth, a less vibrant loyalty program and virtually no international capabilities in Choice's platform, we're frankly not surprised," he said. "Our business offers a medicine cabinet full of remedies. Our board has taken its fiduciary duties very seriously with respect to shareholders and other stakeholders, including franchisees, employees and guests. We strongly believe that Wyndham's standalone plan and multiple levers to drive growth provides a more compelling proposition compared to Choice's offer. Our board is also highly confident in our management team's capability to execute on the plan and create significant value for our stakeholders. We have received multiple inputs from key constituents over the past week, providing us with further confidence in our decision to reject the offer."

When asked if discussions are ongoing, Holmes bristled and said, "It seems like a desperate grab to try to solve problems that the company has. We we have been responsive every step of the way. I have not heard from Choice since we told them that we're disengaging. This is an amazing distraction for the businesses not only ours for there's a bigger distraction for ours probably than theirs."

Holmes further stated that Wyndham believes Choice has some serious issues within their organization and "they're trying to address that by making us the elixir for their problems."

Holmes also made clear that it was Choice who made the bid.  "They called us and they don't have a plan," he added. "So, their plan seems to be to put out repetitive press releases and see if they can churn the water enough to make it interesting for us. I just don't see that as a plan. That's a bit of a desperate plan."

As for any way forward, Holmes said, "It's hard for us to say no more than we've already said no... Let's all get back to business... It's not attractive what they're doing. I don't think it's very friendly. So, if you want a friendly deal done, you don't approach it the way they've approached it. God only knows how they can get a deal to the FTC where we are not a willing participant... So, it's very hard for us to say what's next. The ball is really in their court."

Wyndham President and CEO Geoff Ballotti added, "We've been consistent with Choice from their initial inbound that our concerns would need to be satisfactorily addressed, something they have not done today." 

Ballotti went into greater detail about Wyndham's concerns, first suggesting that the initial $90 per share offer is now worth less as Choice's stock price continues to fluctuate. "It's important to note that Choice has not offered our shareholders any protection against potential continued downward volatility," he said. "Furthermore, the fixed value of the cash portion offered to our shareholders would not be realized until the conclusion of an extended regulatory process, which our advisors estimate could take 12 to 18 months. When we consider all of this one point is clear -- the actual offer is worth materially less to our shareholders if and when they receive it."

Elaborating on anti-trust concerns, Ballotti said U.S. antitrust investigations are at historic highs. "There have been more second request issued by the Biden administration in their first fiscal year than in the preceding 20 years combined," he added. "The party's advisors met on multiple occasions and Choice eventually acknowledged the probability of an extended regulatory review period of at least 12 months. Our business would be uniquely exposed to deterioration risks during a long regulatory review period."

If this uncertainty were to persist for an extended period of time, Ballotti said some portion of Wyndham's development and openings may not materialize, which compounds over time. "Additionally, developers of our Echo Suites brand have expressed significant reservations about deploying such large sums of capital with a brand steward other than Wyndham, jeopardizing the brand's future. Moreover, our considerable momentum and improving franchisee retention rates could also be impacted the longer this drags on," Ballotti said.

Ballotti added that Choice's proposal does not provide appropriate value for Wyndham standalone growth prospects and exploits short term volatility in Wyndham's stock price without a consideration of a broader view of Wyndham's trading levels. "And, the consideration mix includes a heavy portion of Choice stock. Our board has concerns over Choice's organic growth prospects, and those concerns are exacerbated if the pro forma company will be left with an over levered balance sheet that constrains its capital allocation strategy in a material way, further limiting its growth opportunities," Ballotti added.

In concluding his remarks, Ballotti said Wyndham's board remains open to risk adjusted valuation creation alternatives, whether those are driven from internal initiatives from external capital deployment or from third-party opportunities. "Our board believes that the Choice proposal is inadequate on multiple fronts, including its unmitigated, asymmetrical risk allocation, the confidence our board has in our standalone growth strategy that is not being considered by Choice and it's opportunistically timed offer and heavy portion of Choice stock in the consideration mix that we believe has potential for additional downside risk," he said. "We will continue to execute our business model, drive growth, allocate excess capital appropriately, and maintain strong partnerships with our franchisees to drive shareholder value."

Choice said it believes its existing offer rewards Wyndham shareholders well in excess of the present value that could be achieved through a rational Wyndham standalone plan.

“The combined company would enhance competition against larger industry participants with strong balance sheets and an established market presence across multiple segments,” Choice added in its statement. “Many of these competitors have launched brands focused on the Economy and Midscale segments and are actively marketing to hotel owners in those segments. Large, branded alternatives for hotel owners and guests are already present across the Economy and Midscale segments, including Best Western, Extended Stay America, G6 (Motel 6), Oyo, Red Roof Inn, and Sonesta, which would continue to provide multiple options to both current franchisees or hotel owners considering adopting a brand. Many hotel owners choose to be independent and in fact, independent hotels comprise nearly two-thirds of the Economy segment and close to 40% of the Midscale segment.

“Significantly, unlike businesses with centralized pricing, all Choice and Wyndham hotel franchisees have complete autonomy to set their own prices. This consumer-friendly, pro-competitive structure would continue following transaction close. Franchisees, most of whom are small business entrepreneurs, are expected to receive significant benefits from the expanded system size and synergies that a Choice-Wyndham combination would provide. The proposed transaction is expected to lower franchisee costs by increasing direct bookings and create a rewards program on par with the top two global hotel rewards programs. Reducing reliance on third-party distribution channels and increasing rewards member guests has been a proven formula for improving hotel profitability. For these reasons, we were not surprised that many of our and Wyndham's franchisees have expressed their support for the proposed transaction.”