Wyndham Hotels and Resorts, a US budget hotel operator, has rejected a $7.8 billion acquisition offer from rival Choice Hotels, calling it “underwhelming” and citing concerns over regulatory risks. The proposed combination of the two hotel groups, which have nearly 1.5 million rooms worldwide, could attract regulatory scrutiny due to the concentration of economy and midscale rooms in the US. Despite the rejection, shares of Wyndham jumped 10% to $76.28, though they remained well below the offer price of $90 per share. Choice Hotels shares, on the other hand, fell 5%.

Choice Hotels went public with its offer to buy Wyndham after private talks between the two companies collapsed. The potential combination would bring together Choice Hotels' brands such as Econo Lodge, Quality Inn, and Clarion with Wyndham's Days Inn and Travelodge, offering customers a wider range of affordable hotels amid inflation concerns.

Choice Hotels initially offered $80 per share to Wyndham in April, which was later increased to $85 per share in May. Both companies were reportedly within a "negotiable range" on price a few weeks ago. However, Wyndham rejected the latest offer of $90 per share, stating that it was surprised and disappointed by the decision.

Choice Hotels, based in Rockville, Maryland, operates nearly 7,500 hotels in 46 countries and territories. The company has turned to acquisitions to drive growth as unit expansion has proved challenging. On the other hand, Wyndham, headquartered in Parsippany, New Jersey, operates and franchises a portfolio of 24 hotel brands primarily located in secondary and tertiary cities.

Analysts have noted that the size of the combined company would likely require divestments to gain regulatory approval. Despite this, Choice Hotels expressed confidence in obtaining regulatory approvals, stating that the combination would be "pro-competitive."

The rejection of the acquisition offer by Wyndham comes after months of negotiations between the two companies. The proposal from Choice Hotels, which included $49.50 in cash and 0.324 shares of its common stock for each Wyndham share held, represented a 30% premium to Wyndham's last closing price. Choice Hotels' total market capitalization stands at $6.29 billion, while Wyndham's is $5.82 billion.

Wyndham justified its rejection of the offer by stating that Choice's proposal was opportunistic and does not adequately value its growth potential. The company highlighted concerns regarding significant business, regulatory, and execution risks associated with the deal. Wyndham has engaged with Choice and its advisors multiple times to assess the potential risks but concluded that it would likely take over a year to determine the requirements for antitrust review.

Choice Hotels, however, remains optimistic about the value opportunity presented by the potential transaction. The company believes that the deal would benefit both companies' franchisees, shareholders, associates, and guests. Choice offered a combination of cash and stock to Wyndham shareholders, as well as two seats on the new board.

Analysts have speculated that Wyndham Chairman Stephen Holmes may be holding out for a better offer from Choice or another potential suitor, given his expertise in mergers and acquisitions. While Holmes has expressed concerns about the current offer, analysts believe that Choice has made an attractive offer to Wyndham's shareholders.

The travel industry, including hotels, has experienced fluctuations due to the COVID-19 pandemic. While Wyndham's shares have seen a significant increase since the start of the pandemic, Choice Hotels' shares fell following the announcement of the rejected offer.

In conclusion, the rejection of Choice Hotels' acquisition offer by Wyndham Hotels and Resorts reflects concerns over regulatory risks and an inadequate valuation of growth potential. The proposed combination of the two hotel groups, which would offer customers a wider choice of affordable hotels, has attracted attention from analysts. Despite the rejection, shares of Wyndham rose while Choice Hotels' shares fell. The size of the combined company may require divestments to gain regulatory approval, but Choice Hotels remains confident in obtaining such approvals. Both companies have engaged in negotiations for several months, and analysts suggest that Wyndham's chairman may be holding out for a better offer. The travel industry, including hotels, has experienced both positive and negative impacts due to the pandemic.