Choice Hotels on Wednesday called on Wyndham Hotels & Resorts to return to merger talks while publicly responding to concerns Wyndham executives had raised about “execution risk” — including questions about regulatory scrutiny.
Meanwhile, Wyndham issued a statement saying its board of directors remains confident that its “standalone growth prospects offer superior, risk-adjusted returns. It once again rejected the hostile merger, which would value Wyndham at $7.8 billion (plus debt),
One issue in dispute is whether U.S. antitrust watchdogs would balk at consolidation. Choice Hotels has a 16% share of the branded U.S. economy hotel market, while Wyndham has 36%, the FT reported.
Executives at Choice said they had received advice that a merger would receive regulatory approval. (Choice is paying for legal advice from Willkie Farr & Gallagher.)
“Independent hotels comprise nearly two-thirds of the economy segment and close to 40% of the midscale segment,” said Choice Hotels.
Choice Hotels executives also noted that major hotel groups such as Hilton, Hyatt, and Marriott have this year announced new brands to compete in the premium economy and midscale segments. This fresh rivalry would add to the competitive landscape already featuring Best Western, Extended Stay America, G6 (Motel 6), Oyo, Red Roof Inn, and Sonesta.
Choice Hotels’ comments came on the same afternoon that Wyndham executives issued a release reiterating their disinterest in talks. It also came a day ahead of Wyndham’s earnings call.
Wyndham Hotels & Resorts said on Tuesday it had signed 60 more hotels for its Echo Suites Extended Stay by Wyndham brand in the U.S. and Canada.
That brings the extended-stay brand’s pipeline to 265 hotels, with about 33,000 rooms. It’s the fastest-growing brand in Wyndham’s development pipeline.
The growth is remarkable. Wyndham only formally announced the brand last November, and it doesn’t expect to have its first Echo Suites hotel open until 2024. Few other brands introduced in the past few years have gained such rapid traction with developers.
Wyndham partly credits its success to having worked closely with developers when inventing its prototype — obtaining earlier design buy-in than has been customary. The franchisor also has a commercial strategy of signing multi-unit deals with veteran developers, such as MasterBUILT Hotels in Canada.
“From day one, Wyndham made a point of seeking the input of experienced developers and then actioning on their insights,” said David Donaldson, president and CEO, MasterBUILT Hotels.
Skift editors were struck by this chart of Wyndham’s stock price as of Friday. Investors continue to behave as if it would be a good thing for the world’s largest hotel franchisor to merge with another player. Sustained investor pressure on that score might prompt Wyndham’s management to change strategy at some point.
So why would investors cheer an offer for Wyndham?
Baird Equity Research held meetings with Wyndham’s management team after the announcement.
“The company continues to believe the stock is trading at a ‘significant and unwarranted discount,'” wrote the Baird analysts, who agree with management’s view.
To be clear, Baird analysts like Wyndham’s management and neither call for nor predict a merger. But in a flash report, Baird analysts suggested some reasons about why Wyndham’s stock had “underperformed” before the merger rumors.
“The list of potential reasons (among others) includes: growing competition in the lower-end chain scales; recent banking/financing uncertainties that might disproportionately impact Wyndham’s development pipeline; and Wyndham’s typical customer, which has an average household income of $91K, potentially being more impacted from a disposable income perspective due to continued inflationary pressures.”
—Michael Bellisario and Jo Choy of Baird.
Wyndham’s management had retorts to every concern. They said they saw no signs of fundamental slowing in leisure travel demand or in hotel development deal flow, signings, and ability to meet announced targets. Only about two dozen deals in its pipeline appear to face any risk of headwinds because of trouble getting financing because of recent banking and interest rate turmoil.
And yet, the market continues to value Wyndham more when they believe it’s in play. That partly reflect’s an investor mentality. Analyst David Katz at Jeffries estimated this week that any takeover bid might come with a price premium of as much as 30 percent of Wyndham’s stock prices. Some investors, possibly naive, are looking for a quick gain.
Yet Wyndham has weaker earnings growth forecasts for 2024 when compared with Choice Hotels, its competitor with the most overlap in hotel profile.
To paraphrase Baird’s Michael Bellisario and Jo Choy, risks to Wyndham include:
the sustainability of brand equity and customer loyalty when facing the larger loyalty and co-branded credit card machines of players like Marriott International
the endurance of its popularity among developers especially as larger groups like Hilton and Hyatt increasingly develop brands in the premium economy sector that Wyndham has heavy exposure to
exposure to a more price-conscious traveler during macroeconomic headwinds in the context of rivalry from other hotel brand companies
Wyndham’s management capably managed its way through the pandemic and have consistently met their announced targets while avoiding unpleasant surprises. Yet Wyndham’s trades at a noticeable discount to the sum of its parts, according to a few investment banks that cover the stock.
It appears that some investors believe Wyndham would be stronger as part of a larger group that could have more scale efficiencies, such as in a larger loyalty program, an ability to negotiate deeper discounts on things like furniture supplies and commissions for distribution, and back-office synergies.
If investors continue to signal with their pricing behavior frustration with Wyndham for a year or longer, pressure will only grow on Wyndham’s management to adjust their business strategy in response or possibly entertain merger talks.
Twin brothers Dubi and Chuchu Ajukwu, had invested before in residential and commercial real estate as co-managing partners of VANA Partners. But they hadn’t considered investing in hospitality until the Wyndham program.
Pictured are Dubi Ajukwu (left) and Chuchu Ajukwu (right), who are participating in a Wyndham entrepreneurship program. Source: Wyndham Hotel & Resorts.
“Participating in BOLD by Wyndham has not only enabled us to break into competitive markets with immense growth potential but also allowed us to leverage the scale and resources of the world’s largest hotel franchising company,” said Dubi Ajukwu.
The developers wanted a segment with strong long-term growth in markets that most excited them. It helped them identify the extended-stay sector and to set a goal of owning several properties throughout Florida and the Southeastern U.S., with the brothers hoping to break ground on their first hotel, an ECHO Suites Extended Stay by Wyndham brand, in Daytona Beach later this year.
Wyndham Hotels & Resorts has been teasing since March its plans to debut an economy extended-stay brand, apparently named Echo. On Wednesday, Sandpiper Hospitality filed plans to build what will likely be the first Echo hotel in western Henrico, Virginia, according to a news report.
“Plans show the Echo hotel would reach four stories and include 124 rooms and 133 parking spaces,” reported Richmond BizSense. “HG Design Studio is listed as the project’s landscape architect.”
The site is at 9940 Independence Park Drive. Intriguingly, the rendering submitted by Sandpiper Hospitality showed the name of the hotel being Echo. Until now, the project had been referred to by Wyndham as Project Economy Hotel Opportunity.
Wyndham executives said earlier last month they had deals with developers to roll out 72 projects, with a goal of 300 hotels over the next decade.
