PARSIPPANY, New Jersey—Wyndham Hotels & Resorts announced that its Board of Directors unanimously rejected a conditional, unsolicited stock-and-cash proposal by Choice Hotels International, Inc. to acquire all outstanding shares of Wyndham.
Wyndham’s Board of Directors, together with its financial and legal advisors, closely reviewed Choice’s latest proposal with a nominal value of $90 per share, comprised of 45 percent in stock and 55 percent in cash, and determined that it is not in the best interest of shareholders to accept the proposal.
In rejecting Choice’s proposal, the Wyndham Board of Directors determined that:
- the proposed transaction involves business and execution risks, including an extended regulatory timeline and uncertainty of outcome, potential franchisee churn, and excessive leverage levels at the pro forma combined company
- the consideration mix includes a component of Choice stock, which the Board believes is fully valued relative to Choice’s growth prospects, especially when compared to Wyndham
- the offer is opportunistic and undervalues Wyndham’s future growth potential
“Choice’s offer is underwhelming, highly conditional, and subject to significant business, regulatory and execution risk. Choice has been unwilling or unable to address our concerns,” said Stephen P. Holmes, chairman of the Wyndham Board of Directors. “While our Board would support a value-maximizing transaction, given the substantial, unmitigated embedded risks and value destruction potential presented by the proposed transaction, our Board determined it is not in the best interests of Wyndham shareholders. We have engaged with Choice and its advisors on multiple occasions to explore these risks. However, it became clear the proposed transaction likely would take more than a year to even determine if, and on what terms, it could clear antitrust review, and Choice was unable to address these long-term risks to Wyndham’s business and shareholders. We are disappointed that Choice’s description of our engagement disingenuously suggests that we were in alignment on core terms and omits to describe the true reasons we have consistently questioned the merits of this combination—Choice’s inability and unwillingness to address our significant concerns about regulatory and execution risk and our deep concerns about the value of their stock.”
Wyndham’s Board believes that during the period between the announcement and closing or termination of the transaction, Wyndham shareholders would be exposed to the threat of long-term deterioration of Wyndham’s brand equity, franchisee churn, and impaired integration execution at the combined company in which Wyndham shareholders would have interest.
In addition, the amount of debt required to fund the cash portion of the deal would result in the combined company’s net leverage being over 6x adjusted EBITDA. This above-market leverage would increase execution risk and restrict the balance sheet flexibility of the combined company, putting downward pressure on future growth potential, share price, and valuation multiples. As a result, the value creation from cost synergies may not be fully realized.
Wyndham’s Board also has questions and concerns about the value of Choice’s stock. Choice’s latest offer includes 45 percent in Choice stock, which Wyndham’s Board believes is fully valued. Industry experts share the view of Choice being fully valued, with over three-quarters of research analysts having Choice at a Sell or Hold rating. Wyndham’s Board sees Choice’s offer as an attempt to mask their anemic organic growth and believes Wyndham shareholders are better positioned to own Wyndham’s stock, which has upside relative to Choice’s fully valued stock.
- Net room growth: Excluding the Radisson acquisition, Choice’s organic total net rooms actually declined year-over-year by (2 percent), implying negative organic growth across Choice’s broader brand portfolio for the seventh consecutive quarter. In contrast, Wyndham’s organic total year-over-year net room growth was up 3 percent as of June 30, 2023, which marks the seventh consecutive quarter of positive net room growth.
- Revenue and EBITDA growth: After adjusting for the Radisson acquisition, the organic Choice business displayed H1 2023 growth in revenue of 0 percent and an increase in adjusted EBITDA of only 1 percent, compared to Wyndham’s comparable revenue growth of 7 percent and comparable adjusted EBITDA growth of 9 percent.
- EBITDA margin: Wyndham’s operations result in an Adjusted EBITDA margin premium of ~800 basis points compared with Choice.
- Free cash flow conversion: Wyndham’s business model results in higher free cash flow conversion than Choice’s.
Choice’s offer is an attempt to take advantage of point-in-time stock price fluctuations coinciding with a time period where the exchange ratio is favorable to Choice. Choice’s offer is insufficient relative to Wyndham’s recent trading levels, growth momentum, and premiums paid in precedent change of control transactions. Wyndham’s Board believes Wyndham can deliver long-term shareholder value in excess of Choice’s offer by continuing to execute its business plan.
- Consistent net room growth. Wyndham has reported seven consecutive quarters of positive net room growth and anticipates continued system growth going forward that will continue to provide upside to adjusted EBITDA.
- Growing pipeline. Wyndham’s hotel development pipeline growth continues to outpace peers—up 20 percent over the last two years—and, as of June 30, 2023, stood at an all-time high of approximately 228,000 rooms, which would contribute more than $120 million in incremental annual stabilized royalties.
- New brands. Wyndham’s newly launched brand, ECHO Suites Extended Stay by Wyndham, has established itself as a fast-growing brand with 265 contracts signed since its launch in March 2022.
- International presence and growth. Wyndham’s global brand recognition presents upside growth potential in contrast to Choice’s predominantly domestic portfolio. With more than 3,000 hotels in over 95 countries, the international segment experienced strong growth with system size increasing by 7 percent over the past two years and international royalty rate growing by over 30 basis points since 2019.
- Embedded upside from ongoing retention strategy. Wyndham’s owner-first philosophy and ongoing enhancements to its franchisee value proposition have resulted in its LTM franchisee retention rate improving from 93 percent at spin-off to over 95 percent as of June 30, 2023, with a go-forward target of greater than 96 percent (with each percentage point increase resulting in ~$4.7 million of incremental royalties and ~$3.9 million of incremental adjusted EBITDA).
- Geographic footprint and value proposition align with growth trends. Wyndham’s domestic footprint is expected to benefit from $1.5 trillion Infrastructure Investment and Jobs Act and CHIPS and Science Act spending based on an overlap with allocated spend markets, resulting in incremental royalties of more than $150 million over the next eight years.
Background on Choice Proposals
On April 28, 2023, Choice submitted to the Wyndham Board an unsolicited offer to acquire Wyndham for a nominal value of $80 per share at the time of the offer, with 40 percent of the consideration in cash and the remainder in Choice stock. The Wyndham Board reviewed this offer and deemed it insufficient. On May 9, 2023, the Wyndham Board responded to Choice that its offer substantially undervalued Wyndham relative to its standalone prospects.
On May 15, 2023, Choice submitted a second unsolicited offer to the Wyndham Board for a nominal value of $85 per share at the time of the offer, with 55 percent of the consideration in cash and the remainder in Choice stock. On May 29, 2023, the Wyndham Board responded to this revised proposal with its conclusion that the proposal continues to substantially undervalue Wyndham and puts the value of a combined company at risk given the high level of contemplated debt.
On June 22, 2023, Wyndham’s Chairman and CEO met with Choice’s Chairman and CEO in person to explain Wyndham’s concerns about Choice’s proposal, including the regulatory risks.
On August 14, 2023, Choice’s Chairman called Wyndham’s Chairman and provided a third unsolicited verbal offer for a nominal value of $90 per share at the time of the offer, with 55 percent of the consideration in cash and the remainder in Choice stock, with most of the increase in nominal value from the prior $85 per share offer coming from upward movement in Choice’s share price during the intervening period.
On August 17, 2023, Wyndham’s Chairman met with Choice’s Chairman in person to again explain Wyndham’s concerns about Choice’s proposal, including the regulatory risks, none of which were addressed in Choice’s latest proposal.
On August 21, 2023, Choice submitted a third, written unsolicited offer to the Wyndham Board, reiterating the nominal value of $90 per share verbally offered on August 14, 2023, with 55 percent of the consideration in cash and the remainder in Choice stock. On August 22, 2023, the Wyndham Board responded to this revised proposal with its conclusion that the proposal continues to undervalue Wyndham relative to its future growth prospects, includes a substantial stock component, which the Board believes is fully valued relative to Choice’s growth prospects, and involves business and execution risks for Wyndham shareholders.
Wyndham offered to enter into a customary mutual confidentiality agreement to facilitate discussions around the proposed transaction and the related risks. Choice refused to sign a mutual confidentiality agreement, thereby limiting the extent of engagement between the parties.
On September 5, 2023, Wyndham’s Chairman held a telephonic meeting with Choice’s Chairman to again discuss Wyndham’s concerns about Choice’s proposal, but those issues remain unaddressed by Choice as of today.
During the course of September 2023, Wyndham’s counsel held multiple conversations with Choice’s counsel to discuss regulatory and execution considerations, but Choice was unwilling to propose any mitigations to address Wyndham’s concerns about these risks and was unable to provide any convincing evidence of a pathway to resolve concerns raised by Wyndham.
As a result, on September 27, 2023, Wyndham’s Chairman informed Choice’s Chairman of the Wyndham Board’s decision to reject the Choice offer and the reasons for that determination.
Deutsche Bank Securities Inc. and PJT Partners are serving as financial advisors and Kirkland & Ellis LLP is legal advisor to Wyndham.