Wyndham Worldwide Corporation (WYN - Free Report) recently announced a definitive merger agreement with La Quinta Holdings Inc. (LQ - Free Report) , a midscale hospitality company.
La Quinta’s hotel franchise and hotel management businesses are to be bought by Wyndham for $1.95 billion in cash. The deal is expected to close in the second quarter of 2018.
Following the news, Wyndham’s stock was up 5% on Jan 18. The stock also saw an uptick in the after-hours trading session. Shares of the company have also outperformed its industry in the past year. While the stock has rallied 56.9%, the industry rose 47.2%.
Details of the Deal
Under the merger agreement, La Quinta’s shareholders will receive $8.40 per share in cash. Wyndham will also repay approximately $715 million cash to clear La Quinta’s debt.
Prior to the closing of the acquisition, La Quinta plans to spin off its real estate assets into a publicly-traded real estate investment trust, CorePoint Lodging. Wyndham is keeping aside $240 million cash for bearing the estimated taxes to be incurred from the spin-off.
Following the acquisition, the La Quinta Returns loyalty program will be combined with the Wyndham Rewards program.
Synergies for Wyndham
First, the acquisition will help Wyndham significantly improve its hotel management business and strengthen its brand presence globally. La Quinta has an asset-light, fee-for-service business structure which consists of nearly 900 managed and franchised hotels. After the acquisition, Wyndham Hotel Group can expand to 21 brands and over 9,000 hotels across 75 countries.
La Quinta, being one of the largest midscale brands in the industry, will drive Wyndham Hotel Group's midscale presence and help it enter the fast-growing upper-midscale segment.
Finally, Wyndham expects the deal to result in $55 million to $70 million in annual cost savings and also significantly boost revenues by the end of 2019.
As it is, Wyndham Hotel Group is constantly trying to expand globally through acquisitions as the firms acquired so far have properties in Europe, North America and Latin America.
Why Are Hoteliers on an Acquisition Spree?
We believe that expansion through acquisitions is helping hotels consolidate and expand their presence worldwide. With intensifying competition from different sites like Airbnb or Priceline, the fusing of different hotels will lend a scale advantage to individual hoteliers. Also, companies can rake in higher profits in the competitive market by uniting their resources.
Two acquisitions worth a mention in the hotel space are that of Marriott International’s (MAR - Free Report) buyout of Starwood in 2016 and Hyatt Hotels’ (H - Free Report) merger with Miraval in 2017. In fact, Wyndham Hotel Group has also been carrying out steady acquisitions. The company bought Dolce Hotels and Conference Centers in 2015, Fen Hotels in 2016 and AmericInn in 2017.
We believe the addition of La Quinta will effectively boost the Wyndham Hotel Group segment, which accounted for 23.9% of total revenues in 2016. Hotel Group revenues totaled $368 million in the last reported quarter, up 1.1% from the year-ago figure.
Wyndham carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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