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Choice Hotels (CHH) Faces Setback as Wyndham Rejects Buyout Bid
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Choice Hotels International, Inc. (CHH - Free Report) aimed to solidify its industry presence by proposing a stock-and-cash acquisition of Wyndham Hotels & Resorts, Inc. (WH - Free Report) . Despite the tempting $90-per-share offer, which is a mix of 45% in stock and 55% in cash, Wyndham's board stood firm in its unanimous decision to reject the proposal, citing various concerns. Following the news, shares of Choice Hotels declined 6.8% during the trading session on Oct 17.
One key contention from Wyndham's perspective was the substantial business and execution risks associated with the proposed transaction. The extended regulatory timeline and the uncertainty of the outcome loomed large, which coupled with the potential franchisee churn, made the deal less appealing to Wyndham's board.
The proposed consideration mix comprises a substantial portion of Choice Hotels stock, an estimate that the board deems to be fully valued in relation to Choice's growth prospects, particularly when compared with Wyndham.
Financial Leverage and Downsides
Moreover, financing the cash portion of the deal requires a substantial debt load, leading to the combined company's net leverage to exceed 6x adjusted EBITDA. This higher-than-market leverage introduces heightened execution risk and constrains the flexibility of the balance sheet. This constraint poses a potential downward impact on growth prospects, share price, and valuation multiples, thus potentially impeding the full realization of value from cost synergies.
Image Source: Zacks Investment Research
CHH Vs WH
Excluding the Radisson acquisition, Choice Hotels’ organic net rooms declined by 2% year over year, signaling negative growth for seven consecutive quarters. In contrast, Wyndham reported positive net room growth of 3%, a streak that continued for seven consecutive quarters.
Post factoring in the impact of the Radisson acquisition, Choice Hotels’ core business showed marginal growth in revenues and a modest uptick in adjusted EBITDA by 1% during the first half of 2023. This is in contrast to Wyndham's commendable performance, which boasted a substantial 7% growth in comparable revenues and an impressive 9% growth in comparable adjusted EBITDA during the same period.
Conclusion
While Choice Hotels’ offer seemed lucrative on the surface, Wyndham's board believes in the potential for long-term shareholder value creation by sticking to its current business plan. The consistent positive net room growth, a rapidly expanding development pipeline, and industry-leading new brands paints a picture of resilience and growth for Wyndham.
In the end, Wyndham's rejection of Choice Hotels’ bid leaves us pondering whether this was a missed opportunity for Choice Hotels or a prudent move to safeguard long-term shareholder interests. The intricate dance of corporate negotiations continues and the hospitality sector eagerly watches the next strategic move from both industry giants.
OneSpaWorld Holdings Limited (OSW - Free Report) currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 42.6%, on average. The stock has gained 23.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for OSW’s 2023 sales and EPS indicates growth of 44.5% and 117.9%, respectively, from the year-ago period’s reported levels.
Adtalem Global Education Inc. (ATGE - Free Report) currently carries a Zacks Rank of 2. It has a trailing four-quarter earnings surprise of 22%, on average. The stock has gained 19.1% in the past year.
The Zacks Consensus Estimate for ATGE’s 2023 sales and earnings per share (EPS) suggests growth of 3% and 2.4%, respectively, from the year-ago period’s reported levels.
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Choice Hotels (CHH) Faces Setback as Wyndham Rejects Buyout Bid
Choice Hotels International, Inc. (CHH - Free Report) aimed to solidify its industry presence by proposing a stock-and-cash acquisition of Wyndham Hotels & Resorts, Inc. (WH - Free Report) . Despite the tempting $90-per-share offer, which is a mix of 45% in stock and 55% in cash, Wyndham's board stood firm in its unanimous decision to reject the proposal, citing various concerns. Following the news, shares of Choice Hotels declined 6.8% during the trading session on Oct 17.
One key contention from Wyndham's perspective was the substantial business and execution risks associated with the proposed transaction. The extended regulatory timeline and the uncertainty of the outcome loomed large, which coupled with the potential franchisee churn, made the deal less appealing to Wyndham's board.
The proposed consideration mix comprises a substantial portion of Choice Hotels stock, an estimate that the board deems to be fully valued in relation to Choice's growth prospects, particularly when compared with Wyndham.
Financial Leverage and Downsides
Moreover, financing the cash portion of the deal requires a substantial debt load, leading to the combined company's net leverage to exceed 6x adjusted EBITDA. This higher-than-market leverage introduces heightened execution risk and constrains the flexibility of the balance sheet. This constraint poses a potential downward impact on growth prospects, share price, and valuation multiples, thus potentially impeding the full realization of value from cost synergies.
Image Source: Zacks Investment Research
CHH Vs WH
Excluding the Radisson acquisition, Choice Hotels’ organic net rooms declined by 2% year over year, signaling negative growth for seven consecutive quarters. In contrast, Wyndham reported positive net room growth of 3%, a streak that continued for seven consecutive quarters.
Post factoring in the impact of the Radisson acquisition, Choice Hotels’ core business showed marginal growth in revenues and a modest uptick in adjusted EBITDA by 1% during the first half of 2023. This is in contrast to Wyndham's commendable performance, which boasted a substantial 7% growth in comparable revenues and an impressive 9% growth in comparable adjusted EBITDA during the same period.
Conclusion
While Choice Hotels’ offer seemed lucrative on the surface, Wyndham's board believes in the potential for long-term shareholder value creation by sticking to its current business plan. The consistent positive net room growth, a rapidly expanding development pipeline, and industry-leading new brands paints a picture of resilience and growth for Wyndham.
In the end, Wyndham's rejection of Choice Hotels’ bid leaves us pondering whether this was a missed opportunity for Choice Hotels or a prudent move to safeguard long-term shareholder interests. The intricate dance of corporate negotiations continues and the hospitality sector eagerly watches the next strategic move from both industry giants.
CHH currently carries a Zacks Rank #2 (Buy).
Other Key Picks
Some other top-ranked stocks from the Zacks Consumer Discretionary sector are:
OneSpaWorld Holdings Limited (OSW - Free Report) currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 42.6%, on average. The stock has gained 23.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for OSW’s 2023 sales and EPS indicates growth of 44.5% and 117.9%, respectively, from the year-ago period’s reported levels.
Adtalem Global Education Inc. (ATGE - Free Report) currently carries a Zacks Rank of 2. It has a trailing four-quarter earnings surprise of 22%, on average. The stock has gained 19.1% in the past year.
The Zacks Consensus Estimate for ATGE’s 2023 sales and earnings per share (EPS) suggests growth of 3% and 2.4%, respectively, from the year-ago period’s reported levels.