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

Quarterly report pursuant to Section 13 or 15(d)

Acquisition

Acquisition

6 Months Ended

Jun. 30, 2018

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 the purchase price that the Company withheld to pay La Quinta employee-related liabilities. The addition of La Quinta’s over 900 franchised hotels with a total of nearly 89,000 rooms builds 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 of La Quinta 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 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				$	1,950
Cash withheld to repay La Quinta Holdings Inc.’s estimated tax liability ^(a)				(240		)
Cash withheld to pay employee-related liabilities				(15		)
Net cash consideration				1,695

Cash escrowed from CorePoint ^(b)	$	985
Payment of La Quinta Holdings Inc.’s long‑term debt ^(b)	(985		)
	—			—
Cash utilized to repay La Quinta Holdings Inc.’s long‑term debt ^(c)				(715		)
Net cash consideration (to shareholders of La Quinta Holdings Inc.)				$	980

Total current assets ^(d)				$	47
Property and equipment				19
Trademarks ^(e)				759
Franchise agreements ^(e)				197
Management contracts ^(e)				137
Other assets				8
Total assets acquired				$	1,167

Total current liabilities ^(d)				$	83
Deferred income taxes ^(f)				251
Long‑term debt repaid at acquisition ^(c)				715
Assumed tax liability ^(a)				240
Other liabilities				11
Total liabilities assumed				1,300
Net identifiable liabilities acquired				(133		)
Goodwill ^(g)				1,113
Total consideration transferred				$	980


(a)	Reflects a portion of the purchase price which is expected to be paid in the third quarter of 2018 to tax authorities and/or CorePoint.


(b)	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.


(c)	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.


(d)	The fair values of total current assets and total current liabilities are estimated to approximate their current carrying values.

(e)

The identifiable intangible assets associated with the La Quinta acquisition 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 the second half of 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, (iii) a discount rate of 9.5% and 9.0% for CorePoint franchised and management agreements, respectively.


(f)	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.


(g)	The goodwill recognized in the La Quinta acquisition is not expected to be deductible for income tax purposes.

La Quinta’s incremental Net revenues and Operating income for the three months ended June 2018 were $77 million and $10 million, respectively. The Company’s pro forma Net revenues and Operating income would have been $539 million and $114 million, respectively, during the three months ended June 30, 2018. pro forma Net revenues and Operating income would have been $1,004 million and $198 million, respectively, during the six months ended June 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.