Home Hospitality Wyndham board rejects Choice’s exchange offer

Wyndham board rejects Choice’s exchange offer

Wyndham Hotels & Resorts‘ board of directors, following a comprehensive review with its outside financial and legal advisors, has unanimously determined the unsolicited exchange offer from Choice Hotels International Inc. to acquire all outstanding shares of Wyndham is not in the best interests of Wyndham and its shareholders. The Wyndham board of directors unanimously recommends that shareholders not tender any of their shares into the offer.

“Choice has, once again, failed to address the major value gap and risks of their offer—which remains virtually unchanged from the terms outlined in their previous unsolicited proposal,” said Stephen P. Holmes, chairman of the board. “The core issues we have articulated remain the same: a likely prolonged regulatory review period of up to 24 months with an uncertain outcome; the pure inadequacy of the offer from a valuation standpoint, including the significant equity component of Choice stock; and the lack of consideration for Wyndham’s superior, standalone growth prospects.”

Holmes continued, “Our board has made itself consistently clear on these risks, but Choice continues to ignore what is in the best interests of Wyndham shareholders by repeatedly proposing illusory and unrealistic offers while making inconsistent and misleading public statements. We are confident Wyndham can deliver long-term shareholder value well in excess of the $85 per share offered by Choice by continuing to execute on our existing business plan. The board is steadfast in our recommendation that shareholders not tender their shares into this offer, and we remain fully committed to acting in the best interests of all Wyndham shareholders.”

The company unveiled a presentation detailing the unprecedented antitrust risks this offer presents. The presentation is available on staywyndham.com.

Wyndham’s board of directors conducted a comprehensive review of the offer and recommends shareholders reject the offer for the following reasons:

The offer involves an uncertain regulatory timeline and outcome and does not provide sufficient protections and compensation for the asymmetrical risks Wyndham shareholders would face.

  • Choice’s offer would create the largest U.S. provider of hotel franchise services in the chainscales that serve middle-income guests—economy and midscale—with more than 55% market share in each, resulting in significant uncertainty as to whether the FTC or courts would ever clear the transaction.
  • This complex merger would require an extended period of time to review relative to businesses that are smaller in scope, scale or competitive intensity.
    • The FTC opened a preliminary investigation into the transaction—even before there was an exchange offer or transaction—additional evidence of antitrust concerns and a potential prolonged review process
  • Any extended period between the announcement and closing (or termination) of the transaction exposes Wyndham and its shareholders 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 Wyndham’s fast-growing ECHO Suites brand; and
    • Increased employee turnover and reduced ability to attract and retain team members.
  • Franchisees have vehemently expressed their opposition to a proposed transaction, which heightens the level of business risk and FTC scrutiny.
    • The reception from franchisees has been extremely negative.
      AAHOA, which represents roughly two-thirds of Wyndham and Choice franchisees, has been strongly opposed to a potential combination, noting that having one franchisor control so many economy and midscale hotels would be “highly disruptive.”
    • The Wyndham board is concerned that the announcement of a transaction could result in increased franchisee churn and reduced new development activity.
  • Choice’s public offer in October has amplified the antitrust risk across the franchisee community and with the FTC. As a result, it has become apparent that the risk and the potential damage to Wyndham and its shareholders would be overwhelming.

The offer is inadequate and undervalues Wyndham’s superior, standalone growth prospects.

  • The Wyndham board believes the company can deliver long-term shareholder value in excess of the $85 per share offered by Choice by continuing to execute on its existing business plan.
    • Wyndham has significant embedded upside from its ongoing retention strategy.
    • The attractive mix of Wyndham’s record pipeline provides additional opportunity for accelerated net room growth, above-market RevPAR growth and royalty rate expansion.
    • Wyndham’s geographic domestic footprint is best positioned to capture unprecedented hotel demand in markets receiving the largest allocation of the Federal Government’s $1.5 trillion Infrastructure bill.
    • Wyndham has launched the fastest-growing brand in the industry, ECHO Suites Extended Stay by Wyndham, appealing to this infrastructure demand.
    • Wyndham expects to benefit from ancillary revenue growth including new credit card products, new strategic marketing partnerships and other monetization opportunities.

Choice’s offer mischaracterizes Wyndham’s growth potential.

    • Choice portrays Wyndham’s growth potential as $9 per share, which is an egregious mischaracterization and fails to reflect the outlook Wyndham provided in its October investor presentation, which provides the roadmap for an incremental $20 per share from EBITDA growth potential over the next two years with an additional $16 per share from the deployment of available capital during that period.
    • Importantly this standalone plan does not rely on overleveraging Wyndham’s balance sheet. Rather, Wyndham’s plan can be achieved with leverage remaining in the lower half of Wyndham’s stated target range at 3.5x.
    • Additionally, there is further upside from continued multiple expansion. Since completing its spin-off in 2018, Wyndham’s multiple has expanded and continues to close the gap to its peer set average, which currently stands at 15.7 times. Every 1.0x multiple increase could translate into as much as $8 per share of additional value.
  • The offer represents a mere 4% premium to Wyndham’s 52-week high and a 10% premium to Wyndham’s current stock price (as of Dec. 15, 2023).
    • Importantly, since the announcement of Choice’s proposal on Oct. 17, 2023, Wyndham’s share price has recovered to 95% of its 52-week high, which is generally consistent with the broader lodging sector performance of 99%.
  • Choice’s proposed “ticking fee” is illusory as crafted.

Choice’s stock is at significant risk for further price degradation, with a slower-growing business. Post-transaction, Choice’s leverage level would surpass all other lodging peers’ average leverage ratios—negatively affecting not only the value of the equity consideration in the offer, but also limiting Choice’s ability to invest in future growth.

  • The Wyndham board sees the offer as an attempt by Choice to mask its anemic organic growth by acquiring Wyndham’s global system and capabilities without paying adequate consideration for it to Wyndham shareholders.
  • The 45% stock component is subject to volatility and exposes Wyndham shareholders to excessive risks with respect to the value of the consideration received. Choice stock has already dropped by 12% since its initial public offer.
  • Choice’s stock appears to be fully valued with significant risk for further degradation. Approximately 70% of covering research analysts rate Choice as a “sell” or “hold” stock. Over 90% of covering analysts rate Wyndham as a “buy.”

The offer is subject to a litany of conditions, which make the consummation of the offer highly uncertain.

  • Choice has not arranged committed financing, despite “numerous calls with potential financing sources” (according to its own statements) for more than four months.
  • The offer includes a non-customary “diligence condition,” which the Wyndham board believes is designed solely to serve as a one-way exit option to the offer in favor of Choice.

The basis for the board’s decision is set forth in the Solicitation/Recommendation Statement on Schedule 14D-9 filed today with the U.S. Securities and Exchange Commission.

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