Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v3.10.0.1
Acquisition
 9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisition
Acquisition
Assets acquired and liabilities assumed in business combinations were recorded on the Condensed Consolidated and Combined Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Condensed Consolidated and Combined Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the allocation period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Condensed Consolidated and Combined Statements of Income as expenses.

The La Quinta Acquisition

On May 30, 2018, the Company completed its previously announced acquisition of La Quinta Holdings Inc.’s hotel franchising and hotel management business (“La Quinta”) for $1.95 billion in cash, which includes $15 million of purchase price that the Company withheld to pay La Quinta employee-related liabilities. The addition of La Quinta’s over 900 franchised hotels and nearly 89,000 rooms increases Wyndham Hotels’ midscale presence and expands its reach further into the upper-midscale segment of the lodging industry. In addition, this transaction expands the Company’s number of managed hotel properties from 116 to more than 430. This acquisition will strengthen the Company’s position in the midscale and upper-midscale segments of the hotel industry, which has been and continues to be one of the Company’s strategic priorities.

In conjunction with the acquisition, stockholders of La Quinta Holdings received $16.80 per share in cash (approximately $1.0 billion in aggregate), and Wyndham Hotels repaid approximately $715 million of La Quinta Holdings’ debt and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the taxable spin-off of La Quinta Holdings’ owned real estate assets into CorePoint Lodging, Inc. (“CorePoint”), which occurred immediately prior to the acquisition of La Quinta. Wyndham Hotels financed the $1.95 billion acquisition with proceeds from its $500 million offering of 5.375% senior notes due 2026 completed in April 2018 and a $1.6 billion term loan due 2025 that closed in connection with the acquisition.

The preliminary allocation of the purchase price is summarized as follows:
 
 
 
Amount
Total consideration (a)
 
 
$
1,951

Cash withheld to repay La Quinta Holdings Inc.’s estimated tax liability (b)
 
 
(240
)
Cash withheld to pay employee-related liabilities
 
 
(15
)
Net cash consideration
 
 
1,696

 
 
 
 
Cash escrowed from CorePoint (c)
$
985

 
 
Payment of La Quinta Holdings Inc.’s long‑term debt (c)
(985
)
 
 
 
—

 
—

Cash utilized to repay La Quinta Holdings Inc.’s long‑term debt (d)
 
 
(715
)
Net cash consideration (to shareholders of La Quinta Holdings Inc.)
 
 
$
981

 
 
 
 
Total current assets (e)
 
 
$
68

Property and equipment
 
 
19

Trademarks (f)
 
 
759

Franchise agreements (f)
 
 
228

Management contracts (f)
 
 
137

Other assets
 
 
5

Total assets acquired
 
 
$
1,216

 
 
 
 
Total current liabilities (e)
 
 
$
105

Deferred income taxes (g)
 
 
258

Long‑term debt repaid at acquisition (c)
 
 
715

Assumed tax liability (b)
 
 
240

Other liabilities
 
 
11

Total liabilities assumed
 
 
1,329

Net identifiable liabilities acquired
 
 
(113
)
Goodwill (h)
 
 
1,094

Total consideration transferred
 
 
$
981

 
(a)
Includes additional consideration of $1 million net debt adjustment paid to CorePoint during the third quarter of 2018.
(b)
Reflects a portion of the purchase price which is expected to be paid in late 2018 or early 2019 to tax authorities and/or CorePoint. During the third quarter of 2018, the Company paid $35 million related to this liability. As such, the balance at September 30, 2018 was $205 million, which is reported within Accrued expenses and other current liabilities on the Condensed Consolidated and Combined Balance Sheet.
(c)
As a result of a change in control provision within La Quinta’s long-term indebtedness, CorePoint deposited $985 million into an escrow account which was utilized to repay a portion of La Quinta Holdings Inc.’s existing indebtedness.
(d)
Reflects the portion of La Quinta Holdings Inc.’s long-term debt that was required to be paid by the Company upon a change in control.
(e)
The fair values of total current assets and total current liabilities are estimated to approximate their current carrying values.
(f)
The identifiable intangible assets consist of trademarks with an indefinite life, franchise agreements which have a weighted average life of 25 years and management agreements which have a weighted average life of 15 years. The preliminary fair valuation was performed with the assistance of a third‑party valuation firm, which included the consideration of various valuation techniques that the Company deems appropriate for the measurement of fair value of the assets acquired and liabilities assumed. The final valuation is expected to be completed in late 2018 and may be different from the preliminary results which could result in a change to the fair value of the intangible assets acquired.
The preliminary valuations of the franchise agreements and management agreements are based on a discounted cash flow method utilizing forecasted cash flows from La Quinta’s existing franchise agreements and CorePoint franchise agreements and management agreements (the “CorePoint agreements”) that are estimated to be generated over the estimated terms of such contracts. The expected cash flows projections were based on the terms of the agreements, and adjusted for inflation and the costs and expenses required to generate the revenues under such agreements.
The significant assumptions that were utilized for La Quinta’s franchise agreements were: (i) forecasted gross room revenues, (ii) a franchise fee of 4.5%, tax affected, and (iii) a discount rate of 9.5%.
The significant assumptions that were utilized for the CorePoint agreements were: (i) forecasted gross room revenues, (ii) franchise and management fee rates of 5.0% each, which were tax affected, and (iii) a discount rate of 9.5% and 9.0% for CorePoint franchise and management agreements, respectively.
(g)
The deferred tax liability primarily results from the fair value adjustments for the identifiable intangible assets. This estimate of deferred tax liabilities was determined based on the book and tax basis differences attributable to the identifiable intangible assets acquired at a combined federal and state effective tax rate.
(h)
The goodwill recognized in the La Quinta acquisition is not expected to be deductible for income tax purposes.

La Quinta’s incremental contributions to Net revenues and Operating income for the three months ended September 30, 2018 were $238 million and $31 million, respectively. Pro forma Net revenues and Operating income would have been $1,694 million and $212 million, respectively, during the nine months ended September 30, 2018, if La Quinta’s historical results had been included in the Company’s Condensed Consolidated and Combined Statement of Operations since January 1, 2018. For 2017, pro forma Net revenues and Net income would have been $2,041 million and $263 million, respectively. This acquisition was assigned to the Company’s Hotel Franchising and Hotel Management segments.