DEFA14A: Wyndham Rejects Choice Hotels' Hostile Takeover Bid, Urges Shareholders to Support Wyndham's Board

Wyndham Hotels & Resorts urges shareholders to reject Choice Hotels' hostile takeover bid, deeming it inadequate and risky, and to support Wyndham's own director nominees.

Summary

• Wyndham Hotels & Resorts has sent a letter to shareholders urging them to reject the hostile takeover bid from Choice Hotels.
• Wyndham's board believes Choice's offer is inadequate, fails to provide a sufficient change of control premium, and includes an unattractive consideration mix with a significant stock component.
• The board highlights that Choice's offer undervalues Wyndham's superior standalone growth prospects, which include a potential $26 to $48 stock price upside.
• Wyndham's standalone plan anticipates 7-10% EBITDA growth and the ability to deploy ~$400M of additional leverage capacity.
• Wyndham argues that Choice's offer presents asymmetrical regulatory risk, citing potential antitrust issues and opposition from franchisees.
• The company urges shareholders to vote for Wyndham's eight director nominees at the 2024 Annual Meeting, claiming they are more qualified to deliver shareholder value.
• Wyndham claims Choice's nominees are conflicted and hand-picked to push through the ill-advised hostile offer.
• Wyndham's board believes Choice is pursuing the takeover because Wyndham outperforms Choice in key operating metrics, including organic net room growth and adjusted EBITDA margin.
• Wyndham's board highlights that Choice has a slower-growing business, lower profitability, and would have higher leverage post-transaction.
• Wyndham's board believes the FTC reached out to Wyndham unsolicited and started investigating the deal more than a month before Choice launched its formal offer.

Sentiment

Score: 3

Explanation: The document expresses a negative sentiment towards Choice Hotels' takeover offer, highlighting its inadequacy and potential risks. While Wyndham emphasizes its standalone growth prospects, the overall tone is defensive and concerned about the hostile bid.

Positives

• Wyndham's standalone plan has the potential to deliver significantly greater upside than what Choice is offering.
• Wyndham has a resilient, pure-play franchise business model that has continuously generated earnings growth, stable cash flows, and strong shareholder returns.
• Wyndham has a clear path to deliver shareholder value substantially in excess of Choice's inadequate and uncertain offer.
• Wyndham has returned over 30% of market cap to Wyndham shareholders since going public in mid-2018.
• Wyndham's standalone plan anticipates 7-10% EBITDA growth and the ability to deploy ~$400M of additional leverage capacity.
• Wyndham's board believes that 11 out of 12 Wall Street analysts covering Wyndham have Buy ratings on Wyndham.

Negatives

• Choice Hotels is attempting a hostile takeover of Wyndham with an offer that is considered inadequate and subject to numerous risky conditions.
• Choice's offer is below Wyndham's consensus price target.
• Choice's offer represents no change of control premium.
• Choice's offer has an unattractive consideration mix and exposes Wyndham shareholders to value degradation.
• Choice's offer has a pro forma leverage of 6.3x, which is over twice the peer average.
• Choice's offer has inferior growth prospects with declining organic system growth and development pipeline.
• Choice's offer has a trading multiple that has contracted more than 2 turns over the last 18 months and is at risk of further deterioration.

Risks

• The hostile takeover attempt by Choice Hotels introduces uncertainty and potential disruption to Wyndham's business.
• Regulatory hurdles, particularly antitrust concerns, could delay or block the proposed transaction.
• Franchisee opposition to the merger could lead to attrition and negatively impact the combined company.
• An extended regulatory review period could hinder Wyndham's ability to execute its growth pillars.
• The significant stock component in Choice's offer exposes Wyndham shareholders to potential value degradation.
• The potential proxy contest adds another layer of complexity and uncertainty.
• The ongoing conflicts between Russia and Ukraine and between Israel and Hamas could impact the company's business.

Future Outlook

Wyndham's standalone growth plan has the potential to deliver significantly greater upside than what Choice is offering, with a potential $26 to $48 stock price upside.

Management Comments

• Wyndham's Board has been explicitly clear that in order to make a proposal viable for shareholders, Choice must adequately address the three key issues Wyndham has repeatedly raised: insufficient valuation, unattractive consideration mix and asymmetrical regulatory risk.
• Wyndham's Board believes all eight of its nominees are more qualified with the right mix of skills and highly relevant expertise to oversee the successful execution of Wyndham's global strategy and deliver the most value to shareholders.
• Wyndham's Board believes Choice's nominees lack the skills, expertise and background in key areas critical to Wyndham's business and have been hand-picked by Choice with the sole objective of selling Wyndham for far less than the Company is worth.

Industry Context

This announcement highlights the ongoing consolidation trend in the hotel industry, with Choice Hotels attempting a hostile takeover of Wyndham, a larger competitor. The outcome could significantly reshape the competitive landscape in the economy and midscale segments.

Comparison to Industry Standards

• The document compares Choice's offer to comparable change-of-control deals, noting that Choice's offer multiple of 12.9x 2025E EBITDA is a significant discount to the 16.7x median for comparable deals, which ranged from 14x to 21x.
• The document compares Choice's pro forma leverage of 6.3x to the peer average of 3.2x.
• The document compares Wyndham's adjusted EBITDA margin of 81% to Choice's 69%.

Legal Proceedings

• The offer has separately attracted investigations from four State Attorneys General, including two AGs that recently sued to block another transaction, as well as bipartisan scrutiny from four U.S. Senators.
• Any resulting FTC or AG lawsuit to block the deal will force Wyndham to expend significant time and money potentially lasting well into 2025.

Stakeholder Impact

• Shareholders are directly impacted by the hostile takeover bid and the board's recommendation to reject it.
• Franchisees are concerned the loss of competition would result in higher system fees and diminished brand innovation and investment.
• The outcome of the takeover attempt could affect employees of both Wyndham and Choice Hotels.

Next Steps

• Shareholders are urged to vote FOR Wyndham's eight director nominees on the WHITE proxy card at the upcoming 2024 Annual Meeting of Shareholders.
• Wyndham will file and mail a definitive proxy statement and accompanying WHITE proxy card to stockholders of the Company.

Key Dates

Keywords

Wyndham, Choice Hotels, hostile takeover, merger, shareholders, proxy, EBITDA, franchise, antitrust, regulatory risk, valuation