Exclusive-Choice Hotels prepares to challenge Wyndham’s board -sources

By Anirban Sen

(Reuters) – Choice Hotels (NYSE:) International is preparing to nominate directors to the board of rival Wyndham Hotels & Resorts (NYSE:), seeking to break a stalemate in an $8 billion takeover battle, people familiar with the matter said.

Choice has become a Wyndham shareholder by snapping up its shares in the open market and plans to raise its stake in the coming days, the sources said.

This gives Choice the right to nominate directors to Wyndham’s board come January. If Wyndham continues to rebuff Choice’s acquisition overtures, the latter could turn the election of directors at Wyndham’s annual shareholder meeting in the spring into a referendum for investors on whether negotiations should take place, the sources said.

Choice has started to interview potential nominees for its board slate, the sources added. It is also preparing to launch a tender offer for Wyndham’s shares that would show Wyndham’s investors that there is a firm offer on the table, according to the sources.

A tie-up between the two companies would combine two of the biggest budget hotel operators in the United States.

Choice is making its preparations because Wyndham has repeatedly rebuffed its offers and has refused to open its books so the two sides can engage in mutual due diligence, the sources said. It is possible that Choice will drop these plans if Wyndham decides to negotiate a deal, the sources added, requesting anonymity because the matter is confidential.

Wyndham has indicated it is willing to engage with Choice and is open to signing a confidentially pact if all its concerns about a potential deal are addressed, the sources said.

Parsippany, New Jersey-based Wyndham, which operates brands such as Ramada, Super 8 and Microtel, argued last week that Choice’s latest revised bid continues to undervalue its business. It said it was concerned about the slower growth prospects of Choice’s business and the high amount of debt the combined company would be saddled with in a deal.

Wyndham, which franchises about 9,100 hotels across more than 95 countries, has cited antitrust scrutiny from U.S. regulators as one of the reasons for rejecting Choice’s advances.

Choice, on the other hand, has projected that the combined company would generate about $1 billion of free cash flow in 2024, which would allow it to quickly pay down debt and invest in growth.

Rockville, Maryland-based Choice operates nearly 7,500 hotels in 46 countries, including brands such as Radisson, Country Inn & Suites, and Cambria Hotels.

Choice and Wyndham both declined to comment.

Choice went public with a cash-and-stock offer of $90 per share for Wyndham last month, after the latter privately rebuffed its takeover attempts. Choice had first approached Wyndham with an $80-per-share offer in April.

Wyndham, whose shares are currently hovering around $78, does not view Choice’s stock as an attractive currency and is seeking an offer with a much higher cash component, the sources said. Based on Choice’s latest share price, its offer values Wyndham at about $86 per share.

In a letter to Wyndham on Nov. 14, Choice Chief Executive Pat Pacious outlined a two-year time frame to obtain the necessary regulatory approvals and said the latest proposal included a 6% breakup fee, as well as a so-called regulatory “ticking fee” of 0.5% of the offer price. Choice has also argued that hotel franchisees have complete autonomy to set their own prices, so a combination between the two companies would not result in higher prices for consumers.

Wyndham Chairman Stephen Holmes dismissed the letter as “a step backwards.” He said the two-year approval process would leave his company in limbo, which the breakup fee cannot compensate for.