Choice Hotels International (NYSE:CHH) canceled its bid to buy rival Wyndham Hotels and Resorts (NYSE:WH) this week, walking away from negotiations that have turned hostile in recent months.
Investors seemed almost relieved on both sides, as the stock prices for both companies are up since the deal officially went belly up. Clearly, the general sentiment seemed to be that it’s time to move on.
Hostile takeover
The two lower-cost hotel chains had been in negotiations for nearly a year, dating back to April 2023, but things just became public in October, when Choice announced its bid to buy the remaining Wyndham shares for $90 per share — 45% in stock and 55% in cash. For Choice, the idea was to create a discount hotel behemoth to rival the big boys: Marriott (NASDAQ:MAR), Hilton (NYSE:HLT) and Hyatt (NYSE:H).
However, Wyndham didn’t see it that way. The hotel chain’s board rejected the offer, calling it “underwhelming, highly conditional, and subject to significant business, regulatory and execution risk.”
Relations did not improve from there.
Choice followed up in December with an exchange offer, making its case directly to Wyndham shareholders in an offer that would expire on March 8.
“The exchange offer provides Wyndham shareholders the opportunity to elect to receive the consideration in all cash, all shares or a combination of cash and shares, subject to a customary proration mechanism,” Choice officials stated in a press release.
Wyndham responded a few days later, recommending to shareholders that they reject the exchange offer on the same grounds as before. The company said the offer undervalued its assets, faced a long regulatory review, and was fraught with antitrust risks.
Choice pulls the plug
Fast-forward to March 11, three days after the exchange offer expired, and Choice has officially ended its bid to buy Wyndham.
“While the support from Wyndham stockholders tendering into the exchange offer was significant considering the number of investors structurally prevented from participating at this stage, it was not sufficient for Choice to conclude — particularly when taking into account the Wyndham board’s obvious continuing disinterest in a combination — that a path towards a transaction is available at this time,” officials said in a statement.
Reuters reported that the exchange offer had the support of less than 20% of Wyndham shareholders. Choice also withdrew the slate of candidates it had nominated to serve on Wyndham’s board.
Wyndham Board Chair Stephen Holmes said the company is “pleased that Choice has ended its hostile pursuit and proxy contest following the expiration of its unsolicited exchange offer.”
“We are confident in Wyndham’s standalone strategy and growth prospects under the leadership of our proven management team,” he added.
The Federal Trade Commission (FTC) also expressed relief that the takeover attempt failed. The merger of two budget hotel brands would take one major competitor out of the mix, thus reducing competition.
“I am pleased that Choice Hotels International has abandoned its efforts to seize control of its rival Wyndham Hotels & Resorts,” said FTC Bureau of Competition Director Henry Liu. “The FTC was closely scrutinizing Choice’s tender offer as well as its efforts to replace the Wyndham Board of Directors with its own hand-picked slate of nominees. Each of these actions posed serious competition questions, and their abandonment is a win for consumers.”
Where do things go from here?
Wyndham clearly did not see value in this marriage from the start — at least in terms of the offer that was put forth — nor did its shareholders. The company’s stock price is up by about 5% since Monday morning, including a 1.5% jump on Tuesday, to around $79 per share.
Choice stock spiked about 7% after hours on March 8 after the exchange offer expired, suggesting a sign of relief among Choice shareholders that no deal was consummated. Since Monday, the company’s share price is down by about 3% to $126 per share, although it’s still up since last Friday.
Of the two stocks, Wyndham appears to have more upside, with a forward price-to-earnings ratio of 18 that is slightly below Choice’s 20 forward P/E ratio. Analysts also see more potential, as the consensus price target for Wyndham is $90 per share, which would be 14% higher than the current share price. The median price target for Choice is $123, which would be a 3% drop from the current price.
Wyndham’s outlook for 2024 looks decent too, with revenue per available room (RevPAR) projected to increase by 2% to 3% and overall revenue expected to rise by 4% to 6% in fiscal 2024.
Choice can certainly regroup and refocus after this strategic setback, but at this point, you can see why it wanted a merger more than Wyndham.
