The market reacted swiftly after The Wall Street Journal reported Tuesday that Choice Hotels International would seek to purchase Wyndham Hotels & Resorts. A MarketWatch report noted Wyndham shares had climbed 7.2% by the end of the day.
The rumored merger, if it were to proceed, would create one of the largest budget hotel owners in the country. Wyndham is the largest hotel franchise company globally, and Choice is also a major hotel franchisor. Combined, they would own nearly 17,000 hotels worldwide.
Experts tell Hotel Dive that Choice has strong reasons to pursue a potential deal. However, they have also cautioned against too much optimism. Regulatory and financial issues could hinder the deal. Not to mention, neither company has confirmed WSJ’s report.
“I think it’s a long shot,” said Sean Hennessey, clinical associate professor at New York University’s Tisch Center of Hospitality. And Skyler Cooper, a hospitality investment advisor at Marcus & Millichap, called the deal “probably not very likely,” though he said to “never say never.”
Why it could be a good move
According to Hennessey, both brands are “really well positioned in the franchise world,” and are active in the midscale and economy segments, even if Wyndham has slightly more upscale offerings. “They overlap a lot,” he said, which would create synergies if the brands were to merge.
A merger could work, Hennessey continued, noting Marriott’s acquisition of Starwood in 2015. Both companies had brands competing for the same customers, and when they combined, they amassed enough market share to move the market to their advantage, he said.
With Wyndham — which has “a great international presence,” according to Cooper — Choice would become a major global brand “almost immediately” if the deal went through.
Dan Wasiolek, a senior equity analyst for Morningstar Research Services who covers lodging, told Hotel Dive that Choice's interest in acquiring Wyndham would give the company added scale, given that, in his view, "Wyndham shares are currently undervalued to both its own intrinsic value and compared to peers."
“On the other hand, [my team at Morningstar] struggles somewhat to see Choice’s interest in Wyndham’s economy business, which is a meaningful portion of its total revenue, as Choice is focused more so on higher priced hotels.”
“Further, a combination of Choice and Wyndham might face anticompetitive hurdles, given the high share of lower-priced hotels it would have in an acquisition,” Wasiolek added.
Choice’s potential obstacles
In addition to regulatory concerns, Cooper noted financing would be a challenge in the current high-interest rate market, a sentiment Hennessey echoed. There would also be integration challenges, possible shareholder opposition and even potential customer backlash as the companies figured out how to combine their loyalty programs, something that was a major issue when Marriott acquired Starwood, Cooper said.
Another question, according to Hennessey: “Once they're merged, is the parent company going to show the same amount of love to each of the individual brands within the two groups?”
There are also the general challenges of running legacy brands, particularly in the economy and midscale segments.
“The beauty of those old legacy brands is that they generate substantial royalty fees on an ongoing basis,” Hennessey said. “The flip side though, is that as your brands become more entrenched and older, it becomes more of a challenge to keep them all looking fresh and new, and [keep] up with consumer desires.”
Experts caution it’s still early days when it comes to potential movement on a deal. If it were to proceed, a next step to look for would be “formal recognition from both sides that there’s mutual interest,” Cooper said. So far, there has not been one – a spokesperson for Choice Hotels told Hotel Dive shortly after WSJ’s report: “We do not comment about market rumors and speculation.” Wyndham has also not commented on the deal.
Either way, “I can tell you it will be very interesting,” Cooper said. “We’ll be watching closely.”
