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November 22, 2023

Breakingviews: Choice Hotels takes a vacation from reality

by Breakingviews.

Despite its name, Choice Hotels Internationals seems to be making some dubious choices. The operator of budget accommodation chains including Comfort Suites has attempted to sweeten its unsolicited and unwelcome bid for rival Wyndham Hotels and Resorts. But the offer looks to have misjudged a volatile market, and sprucing it up further could leave Choice in the financial equivalent of heartbreak hotel.

Wyndham had already rejected Choice’s offer of $90 per share, which represented an implied premium at the time of 38% and valuing the target at $9.8 billion, including net debt. On Tuesday, Wyndham said it received another letter from Choice chief Patrick Pacious, this time offering a 6% bonus fee if regulators block the deal, and 0.5% of the purchase price per month if it takes more than a year to close. But Wyndham has numerous objections that the new approach doesn’t address, ranging from its concerns over Choice’s growth prospects to the fact that the bidder’s falling share price has already cut the value of the deal to $86 per share.

Choice looks a bit stuck. On one hand, Wyndham says that the part-cash, part-stock deal would leave its own shareholders owning a company with debt equivalent to almost 6 times this year’s EBITDA, even after considering the $150 million cost savings the bidder hopes to realize. That is a far higher level of indebtedness than other hotel competitors Hilton Worldwide and Marriott International. But if Choice were to pay the whole lot in cash – something Wyndham says could bring it to the negotiating table – leverage would rise to an eyepopping 8 times EBITDA.

Then there is the question of customers—in this case franchise owners. The Asian American Hotel Owners Association, which represents 60% of hotel operators in the United States, is swinging hard against the deal because it is concerned about hotel owners having less choice. In theory, being part of a bigger company might help lower costs associated with online travel fees, but the risk of angering the franchisees on which both companies depend seems high. Choice might be better rolling out its towel somewhere else.

(The fee payable by Choice if the deal takes more than a year to close has been corrected to 0.5% per month in paragraph two.)

Context News

Wyndham Hotels and Resorts said on Nov. 21 that would-be acquirer Choice Hotels International had revised the terms of an earlier takeover approach, but that Wyndham had rejected the new bid. Choice unveiled a $90-per-share offer for Wyndham on Oct. 17, valuing the target at $9.8 billion including debt. The two companies had been negotiating in private since April. The new offer includes a reverse termination fee, payable by the buyer if the deal fails to close for regulatory reasons, worth 6% of the purchase price.

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