Applying Lessons From Blackstone-Hilton to Wyndham Hotels

Please download the attached LBO analysis here.

In April 2023, Choice Hotels sent a letter to Wyndham’s Board of Directors indicating its interest in acquiring Wyndham. Although this letter revived decades-long sporadic discussions between the companies about a potential merger, the key point of interest in this takeover attempt was Choice’s outright hostility paired with Wyndham’s extreme reluctance to accept the offer.

An offer of $80/share was made to Wyndham in early 2023, of which roughly half would be paid in Choice shares and the remainder paid in cash. However, Wyndham immediately fired back with a list of notheworthy grievances that I am frankly surprised did not immediately dissuade Choice from pursuing the matter further. However, Choice responded twice last year by making unsolicited offers, first by increasing the offer price to $85 and then finally up to $90 per share.

1. Offer Mechanics: Wyndham expressed a lack of confidence in Choice’s shares, which was fair given that 70% of sell-side analysts covering the stock had given it a sell or hold rating while over 90% of Wyndham analysts rated it a buy. Pro-forma leverage was expected to surpass all lodging peers, despite Choice’s claims that the transaction would deleverage the combined company signficiantly post-synergies.
2. Valuation: The offer price represented a 4% premium to the company’s 52-week high and a 10% premium to the closing price in mid-December. Given that Choice shares had already fallen by over 10% since the offer was announced, Wyndham shareholders were at risk of an immediate decline in value should they accept Choice shares.
3. Regulatory issues: Given the size of these companies, uncertain outcome and 12-month standstill at this point, regulatory considerations are important as well. The merged company would be the largest US provider of hotel franchise services serving middle income guests with over 50% market share. In fact, the FTC had launched a preliminary investigation in 2023.
4. Hostililty: Choice’s own advisor Moelis had presented, in a 2019 panel, the fact that in 2019 there were 98 unsolicited offers made with an EV >$1bn. Of those, 10 became hostile but none closed. It seems like Choice is headed down this path.
5. Multiple Expansion: Wyndham Hotels spun off from Wyndham Worldwide in late 2018 and management expects its multiple to close in on peers at an estimated 15.7x EBITDA. Now I am generally skeptical on this point — it has been five years so I’m not sure how much longer shareholders can be expected to wait but this was an answer provided by management.

Now I dont hope to discuss a merger arb idea in this post. It’s evident that the merger with Choice will likely fail given that the benefits are obvious for Choice (deleveraging, ability to expand market share etc.) but not as clear for Wyndham. However, this offer has uncovered key highlights and reasons why Wyndham can be an attractive acquisition target for a large sponsor.

The company has an extremely strong brand name, has been under PE ownership before and has a proven management team. The cyclicality inherent in the travel & lodging industry is also somewhat mitigated by Wyndham’s presence in the value/middle-income segment of hotels. Value creation levers are evident as well. Blackstone grew Hilton through the expansion of credit card products, continued marketing partnerships and potential data monetization opportunities due to their global presence; all of these are still available to Wyndham. While it is unknown what the training process looks like for new Wyndham managers, Hilton managers under Blackstone’s leadership spent their first three working days working at the fornt desk, housekeeping and in the kitchen. These improved company culture, which can be difficult to maintain in a large global brand.

The company is also building out their Echo Suites brand of extended stay accomodations that should further develop the company’s top line while limiting incremental back office costs. The new brand, just 60 locations strong, will still have strong bargaining power due to Wyndham’s market share.

Apollo’s acquisition of Las Vegas Sands (LVS) and David Sambur’s comments regarding the transaction also uncovered some possible insights in the case of a potential Wyndham buyout. The size of LVS meant that there was a lack of sponsor interest, and at the time, questions around travel recovery had resulted in muted optimism. I believe that there are similarities with Wyndham here. The size of the company ($10bn purchase EV) means that not many sponsors can chase such a target. While COVID has largely passed, there is still a lingering question about travel recovery in the coming months due to inflationary pressures on households which may limit consumer spending. These factors all present an attractive entry point for a large sponsor (Apollo/Blackstone etc.).

Value creation at Wyndham has stalled due to Choice’s offer. However, the buildout of the Echo brand can provide an avenue for inorganic and organic growth. Furthermore, the low franchise concentration, with no 1 franchisee controlling more than 2% of hotels, suggests that the company can still franchise away all remaining company-owned properties to expand margins.

Note: In reality, there is 1 franchisee that controls 12% of Super 8s in China. However, the limited international presence in China makes this a non-issue in my opinion.

Finally, I believe that management is really underestimating the company’s growth potential and with sponsor-backing, Wyndham can realize its true potential. YoY revenue growth last year was 2%, a far cry from its 11% yoy growth pre-COVID in 2019. Management is also predicting 4% growth in the future, which I again think is too pessimistic. Management has a 2–4% net room growth rate target (directly controlled by capex spend). However, they’ve had 4% organic net room growth two years ago and prior to that as well. Therefore, I don’t think this target is overoptimistic, and all else being equal, this should reach management’s revenue growth estimates provided that they maintain pre-2023 capex spend. Next, inflation of 2%+ will increase the company’s top line further. The company’s international presence (where inflation is probably higher) will push this higher, likely contributing upwards of 3% for revenue growth. All of this is not factoring in the pricing power that Wyndham can continue to exercise with its franchises that should further improve the top line. As a result, I used 6% revenue growth in the holding period, which frankly is a base/bear case in my opinion.

In my base-case, “don’t-touch-it” scenario where I keep margins mostly flat and revenue growth at 6%, the company earns an IRR of 22% and 2.7x MoM. Now this is assuming that a 15% premium ($86 per share) will be sufficient at entry. I believe that the offer price does not need to exceed Choice’s offer of $90 because Wyndham’s refusal to sell to Choice was primarily because of the buyer’s characteristics. Furthermore, the offer, while steep, was largely a stock deal and so a cash deal of $86/share may still be accepted by shareholders.

Ultimately, I think that Wyndham has largely traded sideways after the fight with Choice and continues to offer tan attractive entry point to a large sponsor for the reasons listed aove. A base case LBO analysis implies an attractive IRR, Obviously, the key risk of investing in the travel industry cannot be fully eliminated but given Blackstone/Apollo’s expertise with Hilton/Caesar’s, I have no doubt that Wyndham will be a significantly easier investment to manage.