Wyndham Hotels & Resorts WH
June 01, 2018 - 11:36am EST by
2018 2019
Price: 59.50 EPS 3.05 3.36
Shares Out. (in M): 102 P/E 19.5 17.7
Market Cap (in $M): 6,093 P/FCF 18.5 16.6
Net Debt (in $M): 2,000 EBIT 535 580
TEV ($): 8,093 TEV/EBIT 15.1 13.8

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We believe that Wyndham Hotels & Resorts is a compelling long.  As the largest hotel franchise company in the world they have substantial room for continued growth following the LQ acquisition.  Their synergy targets seem very achievable and management has a history of successful integrations. WH will follow in the steps of MAR and HLT which performed very well following their separations from their timeshare businesses.  


The first day of trading for Wyndham Hotels & Resorts (WH) was June 1st following a spin-off from Wyndham Worldwide Corporation (WYN).  WH completed its acquisition of LQ on May 31st (the transaction was announced on Jan 18th, 2018).


Following the acquisition of La Quinta, WH is the largest hotel franchise company in the world by a significant margin.  90% of the revenue is from fee for service agreements (their franchise agreements) which are also very high margin.



The acquisition of La Quinta for $1.95B was for 16.5x Franchise and 2017 Management Segment Adjusted EBITDA of $118M.  However, once you consider the 2018 EBITDA with synergies of $151-$172 it is only ~12x 2018 projected EBITDA. This includes $55-70M of synergies, however almost all these synergies are cost synergies.  With a combined cost basis of $1.6B, the synergy assumptions of $55-70M seem very conservative.



WH only assumes $3-5M in revenue synergies and those are just from adding LQ to their current credit card programs.  This likely understates the potential synergies from the acquisition, as there are likely to be significant benefit in being able to offer additional brands to their franchisees.  


There is also significant room to increase their royalty fee.  As they noted on their Analyst Day, they have historically grown hotels in China with a master license franchisee, with 2 master license franchise developers.  However, their royalty rate under this arrangement is 1-1.25%, significantly lower than their current 3.8% overall royalty rate. One of the master licences is for the Super 8 brand which has ~1500 hotels in China.  Given that the partner is a PE firm and WH has the right of first refusal it seems highly likely that WH will have a simple accretive deal to buy back the master franchise at some point over the next few years. However, they have now established a sales team in Shanghai and introduced brands that are selling at the same royalty rates as in the US.  This gives them significant runway to grow overall royalty rates in China and in other key emerging markets.