Choice Hotels: Hostile Wyndham Bid Stands to Lift Competitive Position, but Upscale Still Lacking

We think narrow-moat Choice’s hostile bid for narrow-moat Wyndham WH would, if completed, make a combined entity more competitive than each of them is on a stand-alone basis as scale entices both third-party owners and travelers to join operator ecosystems in the hotel industry. To this point, a combined company would double its revenue share to around 4%, according to Euromonitor, matching number-three player narrow-moat InterContinental, or IC, while still trailing narrow-moat companies Hilton and Marriott. Further, it would expand Choice’s room base to over 1.4 million from more than 600,000, making it second only to Marriott’s 1.6 million. It would also combine Wyndham’s more than 100 million loyalty members with Choice’s 60 million, getting it closer to industry leader Marriott’s 186 million. As a result, a merged entity would be able to offer owners increased procurement, distribution, loyalty, and reservation advantages, while travelers would have more hotel choice.

While the scale advantages are clear, we believe Choice and Wyndham’s portfolios are lacking the upscale and luxury presence of Marriott, Hilton, IC, and Hyatt. Yet this proposed deal stands to add to Choice’s already-heavy economy and midscale exposure. We think the strength of Choice or Wyndham’s economy and midscale portfolio would be leveraged more if one of the higher-end players acquired either and gained scale in the lower-priced segments.

Terms of the deal provide a reasonable valuation for Wyndham shareholders, who stand to receive $49.50 per share in cash and 0.324 of Choice shares for each share of Wyndham, which, after Choice’s 6% drop, equates to around $87 per share, near our $89 fair value estimate that we are maintaining. The purchase price represents around 13 times our 2024 EV/EBITDA forecast but 10.5 times when including the expected and reasonable estimate of $150 million in anticipated synergies. Given the hostile bid, we are maintaining Choice’s stand-alone $130 valuation.