HPT Case
Case TA Answers: 1. This is a good deal for HPT’s shareholders and they did it for several reasons:
First of all, TA’s operating business was spun off for federal income tax considerations.
To maintain its status as an REIT for tax purpose, a large majority of HPT’s gross income had to be generated from real estate rents or mortgage interest. To meet these requirements, HPT was forced to divest itself of TA’s operating business.
Second, the management of HPT believed that the rental income from TA’s sites would significantly diversify its revenue stream by providing exposure to a historically recession-resistant industry that did not follow the cyclical patterns of the hotel industry.
Finally, the spin-off will unlock the hidden value …show more content…
EV=Equity value+ debt (short+ long)-cash (and equivalents)+capital lease obligation= $142271325= $142.27 (MM)
The HPT gives $213 million to TA in order to cover up real estate properties and help TA to run its business without increasing leverage ratio. Also, it can help create better balance sheet, thus facilitating publicly trading and decreasing default risk by and large.
4. What is the fair value of one share of New-TA?
1) Multiple valuation method
We use Pantry (PTRY) as comparable firm from three comparable firms.
Because Pantry has a similar business model as New-TA, it leases most of its stores for operation instead of owning them (it owns 368 stores, but leases 1125 stores). Nevertheless, the other two firms own most of their stores, so they are excluded from our selection. Thus, EV/EBITDA=7.1(data for 2007)
Post-acquisition depreciation $18029000(Exhibit 9)
Post-acquisition EBIT $14936000(Exhibit 9)
EBITDA = $32965000. (Exhibit 9)
Based on our multiple valuations using 7.1 times of EBITDA multiple, the fair value of New-TA is 234.05(MM)
Equity Value= EV- debt + cash - Capital lease obligation= $341.99(MM)
Price per share= $341.99mm/8628425=
First of all, TA’s operating business was spun off for federal income tax considerations.
To maintain its status as an REIT for tax purpose, a large majority of HPT’s gross income had to be generated from real estate rents or mortgage interest. To meet these requirements, HPT was forced to divest itself of TA’s operating business.
Second, the management of HPT believed that the rental income from TA’s sites would significantly diversify its revenue stream by providing exposure to a historically recession-resistant industry that did not follow the cyclical patterns of the hotel industry.
Finally, the spin-off will unlock the hidden value …show more content…
EV=Equity value+ debt (short+ long)-cash (and equivalents)+capital lease obligation= $142271325= $142.27 (MM)
The HPT gives $213 million to TA in order to cover up real estate properties and help TA to run its business without increasing leverage ratio. Also, it can help create better balance sheet, thus facilitating publicly trading and decreasing default risk by and large.
4. What is the fair value of one share of New-TA?
1) Multiple valuation method
We use Pantry (PTRY) as comparable firm from three comparable firms.
Because Pantry has a similar business model as New-TA, it leases most of its stores for operation instead of owning them (it owns 368 stores, but leases 1125 stores). Nevertheless, the other two firms own most of their stores, so they are excluded from our selection. Thus, EV/EBITDA=7.1(data for 2007)
Post-acquisition depreciation $18029000(Exhibit 9)
Post-acquisition EBIT $14936000(Exhibit 9)
EBITDA = $32965000. (Exhibit 9)
Based on our multiple valuations using 7.1 times of EBITDA multiple, the fair value of New-TA is 234.05(MM)
Equity Value= EV- debt + cash - Capital lease obligation= $341.99(MM)
Price per share= $341.99mm/8628425=