New terms fall short on share offer price and termination fees, according to Wyndham, who also claims dirty pool by Choice in ongoing franchise development competition.
PARSIPPANY, New Jersey – Wyndham Hotels & Resorts on Tuesday responded with a
resounding “no” to a November 14 updated offer letter from Choice Hotels CEO Patrick Pacious,
suggesting it continues to undervalue Wyndham’s standalone growth prospects and
called the overture “a step backward” in the discussions.
Taking it a step further, Wyndham Chairman Stephen Holmes called out Choice for exploiting the uncertainty around Wyndham to seek a competitive advantage in the market for franchisees and development partners.
Clearly, the two sides have a lot of work to do to find common ground toward executing a deal. “Wyndham wants more cash, more value, and more certainty... and
that will cost Choice more implicit and explicit dollars, in our view,” wrote
R.W. Baird analyst Michael Bellisario. “It’s a negotiation (and still very much
a public negotiation), and we believe the latest proposal from Choice is just
one step toward narrowing the still-wide bid-ask spread.”
On the offer terms, Wyndham stated that at Choice’s current share
price, its offer to acquire all outstanding shares of Wyndham stands at a value
of $86 per share, below the $90 per share proposed on October 17, the date of
Choice’s public disclosure.
The Choice letter also proposes a two-year period for it to
seek to obtain regulatory approvals supported by a 6% reverse termination fee,
which Wyndham said would both create a prolonged period of limbo and
expose Wyndham and its shareholders to significant asymmetrical risk.
More specifically, Choice is offering Wyndham reverse
termination fee of $435 million. While Choice does not anticipate it would be
triggered, it is also offering 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 definitive agreements.
Choice also now agrees to take any actions required by
antitrust regulators to close so long as such actions would not have a material
adverse effect on the combined company, subject only to agreeing to an outside
date 12 months post-signing of a definitive agreement, with two six-month
extensions exercisable by either party, if regulatory approvals have not been
obtained by such date.
It also gives Wyndham the ability to operate in the ordinary
course of business during the pendency of the transaction, subject to limited
customary negative covenants.
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.
Stephen Holmes
In a response letter to Choice Chairman Stewart Bainum, Jr.,
Wyndham Chairman Stephen Holmes said that if regulatory approval is prolonged,
it would expose 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.”
Holmes continued, “While your proposal of a 6% 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%,’ 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.”
Holmes also accused Choice’s franchise sales team of playing dirty pool in the franchise development arena. “For example,
your representatives have told owners and prospects that completion of the
acquisition is a ‘100% certainty,’ in an apparent attempt to discourage them
from doing business with Wyndham,” Holmes stated in the letter. “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.”
With regard to the transaction value, Choice continues to offer
$49.50 per share in cash and 0.324 shares of Choice stock. It said that equates
to $90 per Wyndham share based on Choice's stock price as of October 16,
2023 (the “Pre-Release Date”).
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.
Patrick Pacious
Choice said the offer represents a 31% premium to your
unaffected share price on May 22, 2023 (prior to WSJ leak) and a 24%
premium to your share price as of the Pre-Release Date based on Choice's
current stock price, and 37% and 30% premiums, respectively, based on Choice’s
stock price as of the Pre- Release Date.
The offer maintains the cash or stock election mechanism,
subject to a customary proration mechanism. It equates to pro forma ownership
in the combined company of 35%. It also implies a consensus 2023 Adjusted
EBITDA multiple of 14.9x based on the Pre-Release Date value.
As part of Wyndham's response, interestingly, it did suggest an all-cash deal would alleviate certain
valuation-related risks.
At the same time, Choice also suggested a potential next step if the two sides
cannot engage in further discussions is a proxy contest or exchange offer,
without prior notice.
Choice’s Pacious said the industrial logic of the transaction
is irrefutable, pro-competitive and the required regulatory approvals are
obtainable. “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.”
Holmes added, “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.”
Baird's Bellisario proffered that the two sides are still far apart, and the narrowing the bid-ask spread likely will
cost Choice more (both qualitatively and quantitatively). “We
are not surprised by Wyndham's response (and we do not believe investors will
be, either),” Bellisario wrote.