The heat is on for potential Choice-Wyndham deal

NATIONAL REPORT – Tuesday’s news that Choice Hotels has made an exchange offer for Wyndham Hotels & Resorts shares – the same $49.50 in cash and 0.324 shares of Choice common stock per Wyndham share that it offered in October – turns up the heat on the contentious deal. Choice put a deadline on its latest offer, started the clock on regulatory review and continued to scoop up outstanding Wyndham shares worth $1.5 million to increase its leverage.

While a now more pressured Wyndham thinks the offer undervalues the company and is only worth $86 per share versus the $90 that Choice attaches to the offer, the hunted said it will review and evaluate the offer within the next 10 business days to determine the course of action. “However, the offer looks to be unchanged from Choice's previous highly conditional offer the Board reviewed and rejected, which failed to address the serious concerns repeatedly expressed by Wyndham,” its statement read.

R.W. Baird analyst Michael Bellisario wrote on Tuesday that based on yesterday's closing prices, the implied value of the transaction for Wyndham shareholders is $85.66/share, or a nearly 10% premium to the closing price.

Clarity on the regulatory front is what Choice is in search of, and if successful, Choice would hold significantly more negotiating power.

Michael Bellisario

Share this quote

Bellisario opined, “The exchange offer and S-4 filing are the next milestones in Choice's process toward a potential transaction and/or proxy contest. Under the Hart-Scott-Rodino Act, mergers cannot close until the waiting period has passed. Today is day zero, and the antitrust review period is 30 days. A ‘second request’ could occur, which would take another 30 days. Clarity on the regulatory front is what Choice is in search of, and if successful, Choice would hold significantly more negotiating power.”

He added that the success of the exchange offer is less important than the antitrust merger review process – the latter has been the main point of negotiating uncertainty (as well as pricing/timing uncertainty from shareholders' perspectives). Clarity on the regulatory front is what all parties need for a potential transaction to move forward.

Next moves

The Choice exchange offer, which continues to value Wyndham at $8 billion, expires on March 8, 2024, and they do have the option to extend it.

Wyndham shareholders can elect to receive the consideration in all cash, all shares or a combination of cash and shares.

Bellisario astutely reminded that the exchange offer contains numerous conditions, including (but not limited to): 

• Wyndham's Board of Directors removing the Anti-Takeover Devices Condition;
• Choice reaching the Minimum Tender Condition (>50% of shares outstanding tendered, including Wyndham shares owned by Choice);
• Choice obtaining financing for the cash portion of the transaction; and
• Choice being able to conduct due diligence on Wyndham.

Perhaps as big a point of contention is the potential antitrust issue with Choice believing it can close the deal in as little as 30 to 60 days and no more than one year, while Wyndham worries it might take two years or more to get FTC approval, which puts everyone, including owners, in no man’s land.

Truist Securities analyst C. Patrick Scholes wrote on Tuesday that he asked Choice about the October statement by the Asian American Hotel Owners Association (membership owns more than two-thirds of the Choice- and Wyndham-branded U.S. hotels) that rejected the merger. Choice suggested it was more a view of the association than its members, whereas Wyndham has suggested more owners don’t like the prospects of the combined company. Scholes believes the truth is “somewhere in the middle.”

Wyndham also questions the value of Choice shares relative to its growth prospects, which would be further compromised by elevated levels of leverage that this deal would require. But Choice continues to suggest the synergies point to “lots of upside.”

Bellisario’s note also stated, “Wyndham shareholders have almost no incentive to tender their shares until more regulatory clarity emerges closer to the expiration date (March 8). More importantly, the exchange offer and S-4 filing start the clock for antitrust clearance under the Hart-Scott-Rodino Act; Choice is in search of regulatory approval.”

Scholes also said he talked to Choice leadership on Tuesday who said they are confident a deal will close in advance of the ticking fee (less than one year from now) and with regulatory approval. “That said, investor inbounds to today's announcement, the investor presentation, and filing were mixed, with perhaps unfulfilled hope that Choice would sweeten the previous Wyndham offer,” he said.