Wyndham Hotels: Choice’s Hostile Bid Comes With Risk/Reward Considerations

After further digesting narrow-moat Choice’s hostile bid for narrow-moat Wyndham Hotels WH, we see additional factors that need to be considered, which ultimately could hinder the existing offer from gaining Federal Trade Commission and/or shareholder approval. While we still think a $90 per-share valuation for Wyndham is reasonable on the surface, the attractiveness becomes more diluted by some key details. To begin with, around 40%-45% of the hostile bid is Wyndham shareholders receiving Choice shares, and if the price of the latter falls, so would the $90 offer price. The performance of Choice shares can be influenced by the development prospects of both companies. In this vein, there could be resistance from some third-party owners within one of these companies’ networks to want to be part of a combined business, despite the long-term scale advantages we think can come from a larger loyalty, distribution, reservation, and marketing program. Additionally, 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. During this time the overhang of the uncertainty of the deal could hit the development growth and share price performance of either company. Last, the more than $4 billion in debt Choice stands to raise under the existing hostile bid will take time to pay down and could hit its near-term capital needs, influencing its development growth and share price.

While there could be potential for near-term integration risk, in the longer term we think the scale of a merged business would likely entice many third-party owners and travelers to join operator ecosystems in the hotel industry. Further, we think Choice’s guidance of $150 million in cost synergies is achievable, adding credence to the potential merger. We maintain our $89 and $130 per-share valuations for Wyndham and Choice, respectively.