Choice-Wyndham: Debt? Private Equity? Other Bidders? What Comes Next

The talk of last week in Hotel World was Choice Hotels‘ hostile buyout offer for Wyndham, an offer Wyndham quickly rejected.

So what comes next? “We’re pretty determined to re-engage,” Choice CEO Pat Pacious told a Bloomberg News podcast.

But that’s just one piece of the story. Analysts have been weighing other outcomes.

Wyndham says one sticking point is risk of antitrust review.

• Barclays analysts, led by Brandt Montour, said in a report that this might not be an issue. “Marriott was able to consummate its purchase of Starwood even though they together had close to 50% of U.S. Upper Upscale hotels back in 2016,” they wrote.
• Pacious said on the Bloomberg podcast that he saw “execution risk” as a minor concern. “It’s not based in the facts. We’ve been well advised around what it will take to get a deal like this done.”
• That attitude seems a bit over-confident in an election year where the Biden Administration has signaled a more assertive stance on deal reviews.
• “If regulators focus on the roughly 50% brand share the combined company would have in the economy and midscale segments, which is a distinct possibility, it could face an extended review period,” said Dan Wasiolek, an analyst at Morningstar. “During this time the overhang of the uncertainty of the deal could hit the development growth and share price performance of either company.”

The larger issue is price.

• Choice said its offer of $90 a share last week was as high as it could go. Well, perhaps.
• Choice’s proposal — 55% in cash and 45% in stock — would value Wyndham at 14.5 times expected earnings, according to Skift Research.
• That’s an 11% premium to Wyndham’s 52-week high and roughly in line with recent valuations for Choice and Marriott.
• Wyndham seems to be signaling it would prefer more cash and less Choice stock.

Getting more cash won’t be easy for Choice. Current offer requires about $4 billion in debt.

• Choice said it would have to issue some debt but didn’t specify the financing mix of debt and equity.
• Barclays analysts assume Choice would need to pay 8% interest rates. Debt for the merged company would be around $7.5 billion, or five times expected earnings next year. That could lead to even higher interest rates it needs to pay.
• Paying down such debt “could hit [the merged company’s] near-term capital needs, influencing its [hotel] development growth and [thus] its share price,” said Wasiolek of Morningstar.

Private equity might get involved.

• Large private equity firms can provide capital at a lower cost.
• Recent examples: Blackstone’s acquisition of real estate investment trust American Campus Communities and Elliott Management’s acquisition of Travelport.
• Other financial players might also offer cheaper sources of cash or debt. Back in April 2020, investment firms Silver Lake and Sixth Street Partners invested $1 billion in Airbnb in a mix of debt and equity to help the company survive the pandemic.

Is Blackstone interested?

• Bernstein Research analysts told clients they had heard that Blackstone, the world’s largest asset manager, may be interested in some way.
• Blackstone already owns other economy-midscale brands, such as Extended Stay America. So if it bought Wyndham, in theory, it could spin a public company with other Blackstone-owned flags and make the combined operation more robust.
• That would be an ironic outcome for Choice if its hostile bid led to the formation of a stronger rival.

Any other potential bidders? IHG catches the eye.

• InterContinental Hotels Group (IHG) is one contender.
• “We believe the ideal candidate for either Choice or Wyndham is narrow-moat InterContinental as such a merger would provide an end-to-end economy to the luxury global offering, while [the UK-based operator] would also unlikely face much regulatory uncertainty,” said Wasiolek of Morningstar.
• New IHG CEO Elie Maalouf emphasized as a rising executive the need for IHG to expand its reach in North America. A merger with either Choice or Wyndham could help quickly achieve that vision.
• A merger could also make IHG’s loyalty program more competitive for non-U.S.-based travelers visiting the U.S.
• The brands would be largely complementary to, rather than cannibalizing of, its brand portfolio. (See: Every One of IHG’s Hotel Brands, Explained.)
• IHG has a strong balance sheet with total assets of roughly $4 billion (£3.5 billion) as of 2022, including nearly a billion in cash and short-term investments. It has manageable debt levels. As of June 2023, it had a debt to EBITDA ratio below 4 times.

Most likely outcome: Choice tries to woo Wyndham’s shareholders.

• “Should Wyndham decide not to reengage, we at Truist Securities anticipate a potential proxy battle,” wrote analysts Patrick Scholes and Gregory Miller in a report.
• Choice Hotels might nominate its slate of board director candidates and woo shareholders to vote for those people who will approve a merger. The new board members could replace management or okay the merger if they won control.
• Wyndham would wage its own counter-campaign.

What do you think will happen next? Tell me. I’m at so@skift.com and on LinkedIn.