Analysts Skeptical of Choice Hotels Acquisition Interest in Wyndham

25.08.2023 - 13:32 / skift.com / Sean Oneill / Patrick Scholes / David Katz

Some analysts aren’t buying the idea that Choice Hotels International is seriously contemplating an acquisition bid for Wyndham Hotels & Resorts, which The Wall Street Journal reported sources saying was a possibility on Tuesday.

“Somebody’s just thinking out loud,” wrote David Katz at Jefferies’ equity research in a report.

Spokespeople for both hotel companies said they wouldn’t comment on “rumors.” A merger could create the largest hotel franchisor in the U.S. with brands including Comfort, Days Inn, and Super 8.

The share price of Choice Hotels dropped nearly 5 percent on Tuesday after the report. Poor investor response to the potential deal was matched by wariness and skepticism from research analysts at investment banks.

Katz estimated that a deal would require Choice Hotels to pay a 30 percent premium to Wyndham’s stock price if it were to win over Wyndham’s shareholders. That might require Choice Hotels to raise about $6.1 billion of equity. A deal might generate about $100 million in savings through operational synergies, Katz estimated.

“We do not think there is a high likelihood this merger would transpire for several reasons,” wrote analysts Patrick Scholes and Gregory Miller in a Truist Securities research report.

The Truist analysts note that Choice Hotels, an operator of nearly 7,500 hotels, has repeatedly said its strategy consists of re-balancing its portfolio to have more high-end properties that generate higher royalties per unit.

Wyndham is today the largest U.S. lodging franchisor in the economy segment, with 230,000 rooms under management. Adding those budget properties might undermine the Choice Hotels’ strategy, Scholes and Miller noted.

Other analysts agreed.

“On one hand, I’m not surprised at the interest in Wyndham, given it trades at too big a discount to its peers,” said Dan Wasiolek at Morningstar. “On the other hand, I think for Choice to buy Wyndham, it would have to be at the right price, as Choice probably isn’t looking too hard at adding economy exposure, which is a meaningful portion of Wyndham.”

The Truist analysts also doubted there would be a quick gain in overhauling Wyndham’s management.

“In our view, and we believe that of many investors, Wyndham has a very strong management team including below CEO and chief financial officer,” Scholes and Miller wrote. “This would not be a situation where the target needs a change in direction or leadership.”

The analysts praised the strong out-of-the-gate development pipeline for Wyndham’s newest extended-stay brand, Echo Suites, and a successful La Quinta acquisition and makeover that has boosted the returns generated by that brand.

The analysts also noted that Choice Hotels is still busy digesting its recent acquisition