When we said there’d be more mergers and acquisitions in 2018, we weren’t kidding. The first major hotel industry acquisition of the year involves Wyndham Worldwide and La Quinta Holdings.

Wyndham Worldwide, whose businesses include hotels, vacation rentals, and time shares, has announced it plans to buy La Quinta Holdings for $1.95 billion in cash in a deal expected to close by the second quarter. With the addition of La Quinta to the Wyndham Hotel Group, the company will soon have 21 brands and more than 9,000 hotels in 75 countries.

La Quinta, which turns 50 this year, has more than 890 properties with approximately 87,500 rooms located in 48 states in the U.S. and in Canada, as well as in Mexico, Honduras, and Colombia spread out over three brands: La Quinta Inn & Suites, La Quinta Inn, and LQ Hotel. Wyndham Hotel Group’s brands include Days Inn, Super 8, Travelodge, and Wyndham Garden, among others.

The deal is expected to close in the second quarter, and would not impact the already planned spinoffs announced by both companies. Contingent upon the sale of La Quinta’s management and franchise business to Wyndham, the company would spin off its real estate business, CorePoint Lodging, which current La Quinta Holdings CEO Keith Cline would lead as its own separate public company.

Wyndham Worldwide’s spinoff is still subject to approval but is scheduled to close in the second quarter of this year.

We talked to the CEOs of Wyndham and La Quinta about the deal. Keep reading.

La Quinta will be a part of Wyndham’s hotel division, which will be led by Wyndham Hotel Group CEO Geoff Ballotti.

Under the terms of the agreement, stockholders of La Quinta will receive $8.40 per share in cash, which comes out to approximately $1 billion in aggregate, and Wyndham Worldwide will repay approximately $715 million of La Quinta debt net of cash and set aside a reserve of $240 million for estimated taxes. The taxes are expected to be incurred in connection with the taxable spin-off of La Quinta’s owned real estate assets into CorePoint Lodging Inc.

How This Deal Happened

Wyndham Hotel Group, as the company demonstrated last year with its $170 million acquisition of AmericInn, is eager to grow its midscale business, and La Quinta has been open to buyers for some time and to pursue the kind of scale that’s needed to power the growth of its brand.

Interestingly, both companies announced spin-off plans in the last year. La Quinta was the first, announcing in January 2017 that it intended to split itself into two companies: a franchise/management business and a real estate investment trust, CorePoint Lodging. And simultaneously while pursuing the spinoff, the company also said it was open to buyers as well.

That announcement was what enticed Wyndham to begin courting La Quinta, Wyndham Hotel Group CEO Geoff Ballotti told Skift.

“When [Keith Cline, La Quinta Holdings CEO] and his board announced plans to separate the real estate business, we got real serious,” he said. “We’re asset light primarily, and we’re also a company that wants to grow in management space. A deal that didn’t have real estate attached to it got us working fast and furious.”

Cline said that a number of companies expressed interest in acquiring La Quinta over the years, beginning with when he first joined the company five years ago. But it wasn’t until now and the deal with Wyndham that the company agreed to a transaction.

“From the moment I walked in the door, there’s been one conversation after another about who in the industry would be after this business,” Cline said. “It takes a long time to get a business like this to this scale. This brand married up with Wyndham and their brands presents a tremendous opportunity to grow in a very attractive space of lodging. Developers want to be there, and guests want to be there.”

The value of a deal like this for La Quinta’s shareholders, Cline said, was ideal. And the fact that La Quinta is such a mature and established brand in the midscale space is what drew so many companies’ interest in pursuing it. With La Quinta added to its portfolio, Wyndham is strategically growing its dominance in one of the most sought- after sectors in the hospitality industry.

Midscale Mania

Last year, there was a tremendous amount of movement in the midscale space among major hospitality players because it’s so attractive both to developers and to consumers. Many companies announced they were launching new midscale brands, in particular: Trump Hotels announced American Idea. InterContinental Hotels Group said it would roll out a midscale brand, Avid Hotels. Hilton, which opened its first Tru by Hilton property in 2017, revealed it would be launching a new “hostel on steroids” in the near future.

“This all relates to economics on both sides,” said veteran lodging analyst David Loeb, founder of Dirigo Consulting LLC. “Midscale is the intersection of consumer economics.”

He explained that the midscale category — with higher margins, fewer operational complications, and simpler staffing models than the upscale subset — was developed to make cheaper hotels attractive both to own and stay in.

“They were offering consumers the space they like and the layout they like, and a simplicity of experiences that even predates millennials,” Loeb said. “Consumer preferences have really shifted to that, and owners have responded by building those hotels. It’s profitable for owners and for brand families. The reason why I think midscale is more of a focus than upscale hotels is that upscale is more built out. The lower end of select service is less saturated. That’s part of what’s driving these new midscale brands.”

One defining character about each of these new midscale brands is that hotels are getting smarter about not letting them be boring. Even brands that have existing midscale brands put in some effort to market their brands as being more innovative and contemporary, whether to consumers or to hotel owners and developers.

And with La Quinta, it’s clear Wyndham wants to build on the company’s reputation and its relative scale to become a leader in the midscale and upper midscale space, in particular.

“Think back to July, when we bought AmericInn,” said Ballotti. “We want to grow in the midscale space. AmericInn was a strong brand but it is relatively small and concentrated in the Midwest. We talked about how Wyndham is the largest economy player who want to continue to grow, not only in midscale but upper midscale. When you look at a brand with the positioning that La Quinta has in the upper midscale segment of the economy today, it was the most highly strategic, pure fee for service business in a segment we want to grow in.”

Ballotti said the “the overlap between owners is incredible,” too, noting that Wyndham’s largest hotel owners is also the largest hotel owner of La Quinta, too.

“Franchisees love this brand because consumers love this brand,” he said. “This brand has been performing so well from a growth and RevPAR [revenue per available room] standpoint. There’s opportunity for tremendous growth from coast to coast.”

One of those owners, Akhil “Alex” Patel, owner of Bluegrass Hotel Management, said he believes “the deal is positive for both companies.” Edgewood, Maryland-based Patel, who owns a La Quinta  property and has sat on the La Quinta board council for or the Mid-Atlantic and Northeastern states since January 2014, said the deal gives La Quinta “access to a substantially larger pool of loyalty members and distribution platform, while Wyndham is able to offer a compelling upper-midscale product that developers and travelers are looking for. With many markets still open to future development such as the Mid-Atlantic and Northeast, I think that provides significant opportunity.”

Patel added, “I will be waiting to see how Wyndham is able to execute in the crowded midscale space, integrate La Quinta’s core values and seasoned franchise support staff as well as the marketing strategy of the Wingate and La Quinta brands. Additionally, I am curious to see what cost savings can be achieved on the OTA [online travel agency] channel front as well as back-end technology and if that can be translated in 2018 or 2019.”

Wyndham’s Plans for La Quinta

Ballotti said he wants to make sure that La Quinta is fully integrated into the Wyndham Hotel Group and the company will continue to maintain an office in Dallas where La Quinta is headquartered. He also has big plans for integrating La Quinta onto Wyndham’s technology platforms and merging the two company’s respective loyalty programs, and that La Quinta will immediately become one of the company’s “flagship brands.” When the deal is closed, La Quinta will be Wyndham’s third largest brand by size, just behind Super 8 and Days Inn.

“La Quinta has one of the best loyalty programs out there, with 13 million members controlling 40 percent of La Quinta’s occupancy,” he said. He added that “what we’ll work toward as we work toward closing the deal is to offer a status match with our members to provide a much larger choice for Keith’s members to redeem into and for our members to redeem into.”

He added that he is eager to also combine Wyndham’s sales and management forces with La Quinta’s and suggested that La Quinta’s current management team would play a leading role in developing Wyndham’s future growth as a midscale leader.

CorePoint Lodging, which Cline will lead, will also become Wyndham’s largest franchisee with more than 300 real estate assets. “It’s extraordinarily important for that business success to find the right kind of partner and I know together we’ll have an intense focus on product quality, technology, digital, loyalty, and distribution.”

Michael J. Bellisario, senior research analyst for R.W. Baird, said this deal is being received positively by Wall Street but investors will also be paying close attention to the synergies of the deal.

“Shares of Wyndham are trading up nicely, and investors are looking at the EPS [earning per share] accretion from the deal – but that’s because it’s completely debt financed,” he told Skift. “Achieving the synergies will be key. When about 40 percent of the deal’s math is tied to synergies, some clearly more achievable than others, there’s added risk.”

More Mergers and Transactions in Hospitality

This certainly won’t be the first or last acquisition we can expect to see in the hospitality industry, which has seen plenty of significant transactions in recent years, including Marriott’s $13.3 billion acquisition of Starwood Hotels & Resorts and AccorHotels’ purchase of the Fairmont, Raffles, and Swissotel brands. Most recently, Choice Hotels announced its intent to purchase WoodSpring Suites, an economy extended stay brand.

Ballotti said the advantages of scale can’t be denied. “I think this industry continues to consolidate,” he said. “Scale is really important. We are now the company that operates more hotels than anyone else in the industry, and this deal puts us at over 9,000 and makes us one of the three largest in terms of our room size, which does so much for Keith’s and our owners in terms of what we could achieve when it comes to the benefits of scale and cost savings for owners and what owners care about most — contributing to their occupancy.”

For Cline and La Quinta, the pursuit of scale was necessary, too. “As we think about the strategies we pursued at La Quinta as a brand, two of the three we can control — the asset strategy and high-quality guest experiences. But driving engagement with a brand requires scale and that network effect, and internally we couldn’t solve for that. This transaction helps us complete that last very strong pillar of a strategy that’s been underway for the past two years.”

In other words, expect more deals like this in the new year.

Photo Credit: A La Quinta Inns and Suites property near Dallas-Fort Worth. The company is being purchased by Wyndham Worldwide for $1.95 billion in cash. La Quinta Holdings