Wyndham Hotels & Resorts Inc. called Choice Hotels International Inc.’s takeover offer “underwhelming,” rejecting a proposal that would create a budget hotel behemoth.
(Bloomberg) — Wyndham Hotels & Resorts Inc. called Choice Hotels International Inc.’s takeover offer “underwhelming,” rejecting a proposal that would create a budget hotel behemoth.
Choice is offering to pay $90 a share in cash and stock, in a deal valued at about $9.8 billion including the assumption of debt, according to a statement Tuesday. The deal price is 30% more than Wyndham’s closing stock price on Monday.
While the companies have discussed the potential transaction for months, Wyndham’s decision to break off negotiations prompted Choice to take its offer public. Wyndham argued that the deal involved heightened regulatory risks, as well as the possibility for franchisee churn and excessive leverage.
“Choice’s offer is underwhelming, highly conditional and subject to significant business, regulatory and execution risk,” Wyndham Chairman Stephen Holmes said in a statement. “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.”
Wyndham rose 8.7% to $75.12 at 1:35 p.m. in New York. Choice was down 5.5% to $118. Choice’s stock had increased 11% since the beginning of the year through Monday’s close.
Read More: Wyndham Rejects $9.8 Billion Takeover Offer from Choice Hotels
Choice made its initial proposal in April, offering to acquire Wyndham for $80 a share, according to the statement. It sweetened its bid in the weeks that followed, eventually increasing the price to $90 and bumping the cash component to 55%.
“Choice would not make this offer if it were not confident that its franchisees and guests would embrace the proposed combination and that the transaction would receive applicable regulatory approvals in due course,” Choice said in a statement.
Antitrust Risks
Regulators have been stepping up efforts under President Joe Biden’s administration to block deals seen as anticompetitive. Lina Khan, tapped by Biden to lead the Federal Trade Commission, has vowed to take on companies that are thwarting competition.
The agency is suing Amazon.com Inc. for allegedly exploiting its market power. This month, Microsoft Corp. completed its $69 billion purchase of Activision Blizzard Inc. after a nearly two-year fight with regulators.
Combining the two companies would create a giant player in the world of budget hotels. Wyndham operates more than 9,000 hotels across 24 brands, including Days Inn, Ramada and Super 8. Choice has about 7,500 hotels and 22 brands, including midscale, extended stay and economy offerings.
The “combination would significantly accelerate both Choice’s and Wyndham’s long-term organic growth strategy,” Choice Chief Executive Officer Patrick Pacious said in the statement.
Competitive Industry
The economy hotel segment was an industry darling during the pandemic, with occupancies holding up better than higher-rated properties. The strong performance attracted the attention of companies including Marriott International Inc. and Hilton Worldwide Holdings Inc., which have introduced new brands focused on lower price points.
Combining Choice and Wyndham could help the companies better compete for franchisees against larger industry players. It would also create roughly $150 million in cost savings and “topline growth potential,” according to Choice.
“This is an attractive offer for WH shareholders, though we note WH’s Chairman (and former longtime CEO) is very well-versed in M&A and may be strategically holding out for a somewhat better offer” from Choice or someone else, Truist analyst C. Patrick Scholes said in a note Tuesday.
The proposal comes at a time when borrowing costs are high and the US lodging recovery is slowing. The current proposal would likely require Choice to add $4.5 billion in incremental debt issuance, according to a note Tuesday from Baird analyst Michael Bellisario.
“Strategically, we continue to believe a merger makes long-term sense,” Bellisario wrote in the note. “Financially, the pro forma leverage profile is quite high. How many WH shareholders want CHH shares? Is now the right time to be adding $4.5 billion of debt? Can Choice raise its offer?”
–With assistance from Sara Forden.
(Updates with background on antitrust environment starting in eighth paragraph.)
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