Wyndham Hotels & Resorts, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Acquisitions

Acquisitions

12 Months Ended

Dec. 31, 2018

Assets acquired and liabilities assumed in business combinations were recorded on the 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 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 Consolidated and Combined Statements of Income as expenses.

The La Quinta Acquisition

On May 30, 2018, the Company completed its acquisition of La Quinta Holdings Inc.’s hotel franchising and hotel management business (“La Quinta”) for $1.95 billion in cash, which includes $8 million of purchase price that the Company withheld to pay La Quinta employee-related equity award liabilities and $240 million of purchase price that the Company withheld to pay La Quinta tax liabilities, as discussed below. The addition of La Quinta’s over 900 franchised hotels and nearly 89,000 rooms increased Wyndham Hotels’ midscale presence and expanded its reach further into the upper-midscale segment of the lodging industry. In addition, this transaction expanded the Company’s number of managed hotel properties from 116 to 440. 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 withheld cash of $240 million for estimated taxes assumed and 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 equity award liabilities				(8		)
Net cash consideration				1,703

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.)				$	988

Total current assets ^(e)				$	69
Property and equipment				17
Trademarks ^(f)				710
Franchise agreements ^(f)				260
Management contracts ^(f)				119
Other assets				5
Total assets acquired				$	1,180

Total current liabilities ^(e)				$	105
Deferred income taxes ^(g)				248
Long‑term debt repaid at acquisition ^(c)				715
Assumed tax liability ^(b)				240
Other liabilities				11
Total liabilities assumed				1,319
Net identifiable liabilities acquired				(139		)
Goodwill ^(h)				1,127
Total consideration transferred				$	988

______________________

(a) Includes additional consideration of $1 million related to a 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 by 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 December 31, 2018 was $205 million, which is reported within Accrued expenses and other current liabilities on the 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 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 10.5% 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 December 31, 2018 were $198 million and $29 million, respectively. Pro forma Net revenues and Operating income would have been $2,221 million and $294 million, respectively, during the year ended December 31, 2018, if La Quinta’s historical results had been included in the Company’s Consolidated and Combined Statements of Income 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.

The AmericInn Acquisition

During October 2017, the Company completed the acquisition of the AmericInn hotel brand and franchise system for a total purchase price of $140 million, net of cash acquired which included a simultaneous sale of 10 owned hotels to an unrelated third party for $28 million. AmericInn’s portfolio consists of 200 franchised hotels predominantly in the Midwestern United States. This acquisition is consistent with the Company’s strategy to expand its brand portfolio and total system size.

The following table summarizes the fair value of the assets acquired and liabilities assumed in connection with Wyndham Hotels’ acquisition of AmericInn:



	Amount
Trade receivables	$	3
Goodwill ^(a)	44
Franchise agreements ^(b)	46
Trademarks	51
Total assets acquired	144
Other current liabilities	4
Total liabilities acquired	4
Net assets acquired	$	140

______________________

(a) Goodwill is expected to be deductible for tax purposes.

(b) Franchise agreements have a weighted average life of 25 years.

This acquisition was assigned to the Company’s Hotel Franchising segment and was not material to Wyndham Hotels’ results of operations, financial position or cash flows. In connection with the acquisition of AmericInn, Wyndham Hotels incurred $2 million of acquisition-related costs, which are reported within transaction-related costs on the Consolidated and Combined Statements of Income.

The Fen Hotels Acquisition

During November 2016, Wyndham Hotels completed the acquisition of Fen Hotels, a hotel franchising and manager of properties with a focus in the Latin America region, for $70 million, net of cash acquired. This acquisition is consistent with Wyndham Hotels’ strategy to expand its managed portfolio within its hotel management business. The acquisition resulted in the addition of two brands (Dazzler and Esplendor) to the Wyndham Hotels portfolio.

The following table summarizes the fair value of the assets acquired and liabilities assumed in connection with Wyndham Hotels’ acquisition of Fen Hotels:



	Amount
Trade receivables	$	1
Goodwill ^(a)	49
Management contracts	15
Trademarks ^(b)	10
Total assets acquired	75
Other current liabilities	1
Other non-current liabilities	4
Total liabilities acquired	5
Net assets acquired	$	70

_____________________________

(a) Goodwill is not expected to be deductible for tax purposes.

(b)Trademarks have a weighted average life of 20 years.

This acquisition was assigned to the Company’s Hotel Franchising and Hotel Management segments and was not material to Wyndham Hotels’ results of operations, financial position or cash flows. In connection with the acquisition of Fen Hotels, Wyndham Hotels incurred $1 million of acquisition-related costs, which are reported within transaction-related costs on the Consolidated and Combined Statements of Income.