A major U.S. newspaper has reported hotel brand franchisor Choice Hotels International wants to buy its competitor Wyndham Hotels & Resorts, but industry analysts have their doubts.
The Wall Street Journal article cites unnamed sources familiar with the matter as saying Choice is seeking to buy Wyndham, but it adds the two companies “aren’t in serious talks and it isn’t clear whether Wyndham wants to do a deal.” It reports that Choice could take its offer directly to Wyndham’s shareholders, but it’s also possible nothing could come from this.
The article states that shares for Wyndham jumped 5% at closing Tuesday after the reporting. However, Choice’s shares dropped by 4.6%.
Asked for comment, Wyndham said in a statement that “We don’t comment on rumors. We are focused on business as usual, driving value for our franchisees, team members, guests and stakeholders.”
As of publication time, Choice has not responded to a request for comment.
In a note to investors, Michael Bellisario, director of equity research and senior analyst at Baird, said it’s still “early days” but Wyndham was just put “in play,” so other interested financial or strategic parties could reveal themselves. He noted that while there are strategic merits to a merger, namely Choice gaining scale as well as a large development pipeline and a platform with positive net unit growth, the math doesn’t point to earnings per share accretion even with Wyndham shares underperforming peers.
“For Choice, leveraging the balance sheet and taking advantage of the valuation spread would appear to be a logical move,” he wrote. “However, our merger math suggests little to no EPS accretion.”
The deal would require too much cash consideration and incremental debt issuance to achieve the necessary EPS accretion, Bellisario said. Net leverage would then approach 4.5 times.
“In an all-stock deal, too many [Choice] shares would need to be issues for EPS accretion to occur,” he wrote.
In his note to investors, C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said while a deal is possible, he doesn’t think there’s a high likelihood that Choice will acquire Wyndham.
“We find it odd that WSJ came out with the original piece and then a follow-up of the companies not in serious discussions, which almost sounded like they were walking back their original article,” he wrote.
Acquiring Wyndham would be counter to Choice’s strategy of moving away from economy segments and toward revenue-intense segments, Scholes said. Wyndham is the largest U.S. hotel franchisor in the economy segment.
Choice also is still digesting its June 2022 acquisition of Radisson Americas, a deal that has not received “overly robust positive investor reaction so far,” Scholes said.
Choice’s most recent acquisition prior to Radisson Americas was its purchase of WoodSpring Suites in 2018.
Scholes also pointed out some potential anti-trust issues given the number of midscale and economy rooms each company has in their respective portfolios. Looking at year-end 2022 numbers, Choice has about 159,000 midscale rooms and 103,000 economy rooms. Wyndham has about 217,000 in midscale and 236,000 in economy. A combined portfolio would be 72.7% midscale rooms and 48.3% economy rooms in the U.S.
There are some advantages to such a deal, he said, citing as an example Marriott International’s 2016 acquisition of Starwood Hotels & Resorts Worldwide. Advantages include the share of the midscale and economy rooms, Choice growing its international presence through Wyndham and a bigger loyalty program.
As of first-quarter reporting, Wyndham had 844,800 rooms in operation globally. Its pipeline had approximately 1,800 hotels and 226,000 rooms, an 11% year-over-year increase globally. It currently has 24 brands in its portfolio, including Super 8, Ramada, La Quinta, Dolce and Wyndham.
For the same period, Choice had 626,824 rooms in 7,467 hotels, including Radisson brands, in operation. The global pipeline grew 14% year over year to 96,000 rooms, representing 988 hotels. It currently has 22 brands, including Cambria, Ascend, Comfort, Radisson Blu and WoodSpring Suites.
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