WH - Wyndham's Bold Move: Rejecting Choice Hotels' $9.8B Bid

2023-10-23 10:26:34 ET

Summary

• Wyndham Hotels & Resorts rejected a $9.8 billion takeover offer from Choice Hotels International, citing concerns over business risks and undervaluation.
• Wyndham has shown strong growth since becoming a public entity, with a portfolio of 24 global brands and a global development pipeline of over 228,000 rooms.
• The company's financial performance, including a surge in adjusted EBITDA and improved franchise margin, highlights its operational excellence and resilience during the pandemic.

In an intriguing twist to the M&A landscape, Wyndham Hotels & Resorts ( WH ), a name synonymous with luxury and hospitality, recently spurned a $9.8 billion takeover offer from the equally eminent Choice Hotels International ( CHH ). Here's a deeper dive into the factors surrounding this decision and the flourishing trajectory of Wyndham in recent times.

The Rejected Proposal

Wyndham's board showcased a comprehensive understanding of the intricate layers of such a potential merger . They expressed concerns over significant business and execution risks, inclusive of an uncertain regulatory timeline, potential franchisee churn, and the daunting leverage levels for the combined entity. Additionally, the value proposition anchored heavily on Choice's stock, which Wyndham's board reckons might be fully priced relative to its growth prospects, especially in comparison to Wyndham's potential. In simple terms, the board viewed the offer as opportunistic and undervaluing.

Wyndham's Stalwart Performance

Wyndham's recent earnings call encapsulated their monumental growth since becoming a public entity five years ago. Their evolution from a franchised and managed hotel company to a pure-play franchise model is noteworthy. This change led them to sell their owned hotels and exit the US hotel management business.

With an awe-inspiring portfolio of 24 global brands spanning from economy to luxury segments, they have been on an expansion spree. Their presence has mushroomed into over 55 countries, with a remarkable growth of their global development pipeline by over 50% to 228,000 rooms. Despite the COVID-induced economic downturn, Wyndham has displayed resilience, driving a growth rate of over 7% over the past half-decade.

Their financial prowess doesn't end there. A surge of over 70% in adjusted EBITDA and an improvement in their franchise margin from 65% to over 80% over these years are testaments to their operational excellence.

Gazing Ahead

Wyndham's trajectory post the pandemic has been nothing short of stellar. With impressive RevPAR growth, an expansion in net rooms, and a bolstered development pipeline, they're set on a path of sustained growth. The US RevPAR is showing strong resilience against previous records, indicating robust domestic market health. Recent economic indicators further bolster this optimistic view, with the US unemployment rate being at its lowest since the 1960s.

Wyndham's clientele, primarily middle-class with average household incomes considerably above the US median, has showcased a growing travel appetite. With Google search volumes indicating an uptrend for affordable travel and Wyndham's sustained growth from infrastructure accounts, the future looks bright.

Wyndham's tenacity in expanding its global footprint, awarding new contracts, and driving sequential pipeline growth exemplifies its commitment to stakeholders. Their latest endeavors, especially with the Echo Suites by Wyndham brand, signal their intent to entrench their global presence further.

Valuation Metrics Unraveled:

The Price-to-earnings (P/E) ratio sits at 21.99, indicating that investors are currently willing to pay $21.99 for every dollar of earnings. This is a bit high for hospitality opportunities going into a global economic slowdown. The hospitality industry is highly cyclical and will likely see pronounced downturns if the economy falls off the rails. Asset light companies like Wyndham tend to trade at higher multiples, but even if we consider the forward P/E ratio at roughly 17, one could argue that the company is trading a bit too rich when you consider the near-term risks.

The Price to Sales (P/S) metric, clocking in at 4.34 - the value investors place on each dollar of the company's sales. We can see in the chart below that the stock is currently trading above long-term averages, which again implies a bit of a premium.

Wyndham's Return on Assets (ROA) at 7.08% and Return on Equity (ROE) at a robust 29.76% point towards effective asset and equity utilization, respectively. The company's Profit Margin of 20.57% further accentuates its capability to translate sales into bottom-line profits, which is always a plus in the eyes of investors.

Wyndham's Expanding Global Footprint

A Pinnacle of Global Reach : Wyndham boasts an impressive 228K rooms spread across nearly 1,850 hotels worldwide. But it's not just about sheer volume. With its presence spanning approximately 60 countries and newly charted territories—10 regions previously untouched by Wyndham's influence—the hotel chain is undoubtedly positioning itself as a trailblazer in the hospitality sector.

A Streak of Consistent Growth : In the corporate arena, continuous growth speaks volumes, and Wyndham's trajectory is a shining example of this. By the close of Q2 2023, the company proudly marked its 12th consecutive quarter of sequential growth. With year-over-year growth rates boasting a +10% on the global front and an even more commendable +22% in the U.S., Wyndham's success narrative transcends mere numbers—it stands as a testament to strategic excellence.

Decoding the Portfolio Composition : Delving into the composition of the current portfolio, 27% is earmarked as the growth pipeline. A fascinating dichotomy is evident: international holdings command a majority with 57%, while the U.S. trails at 43%. What's more, conversions remain the dominant strategy, accounting for a whopping 81%, with new constructions making their presence felt—a robust 35% already breaking ground.

Spotlight on Segment Dynamics : Within the multifaceted universe of hospitality, Wyndham's mid-scale+ brands are experiencing a renaissance, recording an uplifting +270bps year-over-year growth. This surge, however, doesn't overshadow the established might of the economy brands, which firmly stake claim to 72% of the market share. In essence, the brand dynamics at play are nothing short of exhilarating.

EchoSuits: The Game-Changer : Quietly and steadily, EchoSuits by Wyndham is revolutionizing the concept of extended stays. With a portfolio boasting 265 contracts and a room count nearing 33,000, its recent expansion into Canada underscores the brand's relentless pursuit of broadening its horizons and catering to a diverse clientele.

Franchisee Financing

Franchisee Financing: The Pulse of Asset-Light Hotel Growth

For investors eyeing the asset-light hotel industry's potential, the bellwether lies in the domain of franchisee financing. Economic downturns can disrupt this landscape briskly, but presently, the scenario remains robust. With an emphasis on the forthcoming reports, it's imperative for investors to scrutinize the franchisee financing milieu. To encapsulate the present dynamics:

Highlighted Insights :

1. Community Banks at the Forefront : A substantial 70% of fresh construction initiations for franchisees are underwritten by community banks. Contrastingly, only about 10% gravitate towards self-financing. The tilt towards community banks over their regional or national counterparts underscores the allure of terms they proffer. Such terms, often encompassing higher Loan-to-Value ratios and stable interest rate loans, arguably serve the franchisees more advantageously.

2. Lending Landscape Evolution : The FDIC-insured community bank lending trajectory, in relation to all banking institutions, unfurls an intriguing narrative. The 2015-2019 epoch maintained a consistent growth, averaging at 2.5%. But 2020 upended this trend, soaring to a 7% growth. This upswing met a counterforce in 2021, plunging to -1.5%. However, the subsequent year, 2022, resurrected growth at 5.7%. And the early signs in Q1 2023 are sanguine, with a stellar 7.5% upturn.

As the narrative around asset-light hotel businesses evolves, these metrics and trends will remain pivotal for astute investors aiming to decipher growth forecasts and potential risks.

The Takeaway

Despite the alluring pull of a $9.8 billion takeover bid from Choice Hotels International, Wyndham's board showcased their mettle by rejecting what they perceived as an undervalued offer, signaling their unwavering confidence in the company's intrinsic value and growth trajectory. Wyndham's performance after their spinout has been nothing short of extraordinary. From transitioning into a pure-play franchise model to boasting a portfolio spanning 55 nations, the hotel chain's growth narrative stands as a beacon of strategic and operational prowess. While Wyndham's P/E ratio suggests a premium valuation, their commendable ROA and ROE, coupled with a significant profit margin, underline the company's ability to optimize assets and equity. As Wyndham continues its quest for global dominance, the impressive growth streak, portfolio composition, and segment dynamics underscore its commitment to fostering organic growth and reaching uncharted territories. That said, we are investors first, however, and we make money by shopping bargains. Wyndham isn't a bargain just yet, but fantastic companies seldom are. With real economic risks, I would like to wait for more advantageous prices before initiating a position. I rate Wyndham Hotels as a hold

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