On Wednesday, when the rest of the market was watching in awe as news on the Fed reversed and then smoked a morning rally, the syndicate team at Lehman Brothers in New York was busy managing a 2M block trade of shares in Wyndham Worldwide (NYSE:WYN), one of the world's largest hospitality companies. In this brief report, we cover the lodging industry and speculate as to why Wyndham might be acquired or taken private.
Wyndham Worldwide is headquartered in Parsippany, N.J., and is supported by approximately 28,800 employees around the world. The hospitality chain manages a robust portfolio of 6,300 franchised hotels and 525,000 hotel rooms worldwide, through such iconic brands as Days Inn, Howard Johnson, and Ramada. The company also operates business segments RCI Global Vacation Network (vacation properties in more than 100 countries) and Wyndham Vacation Ownership (vacation ownership resorts throughout North America, the Caribbean, and the South Pacific). Institutions own 77% of the stock.
What in the Devil Could Be Going On?
Wyndham, which was spun off from previous owner Cendant Corporation in 2006, has all the trappings of a prime takeout candidate. While the idea that a firm that was literally just spun out could be subsumed so soon may alarm some, keep in mind that we just saw it happen with another old Cendant unit, Realogy (NYSE:H), which was taken out for 12x 2007 EBITDA. And of course, who can forget Travelport, the first Cendant “orphan” that was sold to The Blackstone Group for $4.3B.
Wyndham itself is no stranger to deal flow. The lodging unit has a rich history of being bought and sold. Formerly operated by Wyndham International, the brand was then bought by travel service titan Cendant in 2005. In 2006, Cendant decided to break into four pieces and unlock shareholder value. Cendant had gotten too big for its own good and according to CEO Henry Silverman, it was time to “realize the value of the underlying businesses.”
As a unit of Cendant, Wyndham did well, holding its own even as oil prices shot up and interest rates climbed higher. Once spun off in 06, WYN was able to clean up the balance sheet and start focusing on its 2 core businesses: vacation time-shares and lodging. 2006 saw new entrants like Disney make aggressive inroads into the time-share space, and Wyndham’s fought back by leveraging its stable portfolio of branded properties.
Wyndham’s crown jewel is its lodging business. 1 out of every 4 hotel room nights in the economy lodging category falls under one of Wyndham’s properties. The properties are not owned by Wyndham itself, but managed by franchisees. This, of course, creates attractive revenue streams for Wyndham. If a suitor were to come in and take Wyndham private, which the recent and aggressive institutional buying seems to suggest, that suitor or group of suitors would most definitely consider these revenue streams as one of Wyndham’s most appealing advantages.
Also on the plate is WYN’s declining debt/equity ratio. Another advantage, we would add, is the curious fact that current Wyndham CEO Stephen Holmes owns less than 1% of the shares outstanding. In our view, little to no insider and CEO ownership is a plus from the buyer’s perspective, as it makes the transfer of ownership all the more facile. Finally, although overlooked by most analysts, we believe Wyndham’s portfolio epitomizes the standardization of amenities: when people visit a WYN hotel, they know what to expect. That is an intangible asset the market may be discounting.
Manageable debt and low insider ownership, in sum, make WYN an attractive LBO/private equity target. While the threat of an economic downturn in the second half of 2007 is palpable, the recent institutional accumulation we’ve been witnessing suggests to us that the smart money is all over this one.
A Word on the Lodging Industry
The lodging industry is a cash machine for those firms that can successfully draw visitors in and keep them coming back. In 2005, $93B was spent to rent hotel/motel rooms in the U.S. We estimate that the U.S. lodging industry is made up of about 5M rooms and over 45,000 properties, in line with consensus (source: Standard & Poors). The market is valued at approximately $123B by most estimates and revenues are expected to climb between 6-8% in 2007. Approximately 75% of all sales come from room rates; the other quarter derives from food & beverage.
Key drivers include: intensive Mergers & Acquisitions activity (which we estimate is predicated on scarce supply of hotel rooms across the U.S.), consumer confidence/disposable income levels, supply/demand, geographic focus, climate, gigantic cap ex programs, and access to capital. Zoning approvals and regulation play a critical role in the lodging space, as they do in the gaming industry. Lastly, oil prices and the general condition of the airline industry also move in lockstep with the lodging group.
Studies found that in 2005, the demand for hotel rooms grew 3.3% while the supply of rooms was up a paltry .4% (source: S&P). At the same time, hotel-related deals were worth $21B in 2005, a 63% increase from 2004. The Blackstone Group, we note, has been ridiculously active in this space. As to whether or not Wyndham will be the next one they swallow is anyone’s guess. Position yourself accordingly: the smart money already has.
WYN 6 mo. chart