Analysts Skeptical Over Rumored Choice-Wyndham Deal

Excerpt from CoStar

A major U.S. newspaper has reported hotel brand franchisor Choice Hotels International wants to buy its competitor Wyndham Hotels & Resorts, but industry analysts have their doubts.

The Wall Street Journal article cites unnamed sources familiar with the matter as saying Choice is seeking to buy Wyndham, but it adds the two companies “aren’t in serious talks and it isn’t clear whether Wyndham wants to do a deal.” It reports that Choice could take its offer directly to Wyndham’s shareholders, but it’s also possible nothing could come from this.

In a note to investors, Michael Bellisario, director of equity research and senior analyst at Baird, said it’s still “early days” but Wyndham was just put “in play,” so other interested financial or strategic parties could reveal themselves. He noted that while there are strategic merits to a merger, namely Choice gaining scale as well as a large development pipeline and a platform with positive net unit growth, the math doesn’t point to earnings per share accretion even with Wyndham shares underperforming peers.

“For Choice, leveraging the balance sheet and taking advantage of the valuation spread would appear to be a logical move,” he wrote. “However, our merger math suggests little to no EPS accretion.”

The deal would require too much cash consideration and incremental debt issuance to achieve the necessary EPS accretion, Bellisario said. Net leverage would then approach 4.5 times.

“In an all-stock deal, too many [Choice] shares would need to be issued for EPS accretion to occur,” he wrote.

In his note to investors, C. Patrick Scholes, managing director of lodging and leisure equity research at Truist, said while a deal is possible, he doesn’t think there’s a high likelihood that Choice will acquire Wyndham.

“We find it odd that WSJ came out with the original piece and then a follow-up of the companies not in serious discussions, which almost sounded like they were walking back their original article,” he wrote.

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