Hardvard Case: TA Answers
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 of TA and the shareholder of HPT will receive shares of TA. As a result, this will create value for shareholders of HPT. The HPT use the spin off for several reasons: Carve-out is partial spin-off, only unlocking partial hidden value.
Most of the time, an equity carve-out ultimately results in the parent company fully spinning off the subsidiary. For HPT, carve-out can’t help them to avoid tax. Sell-off means selling assets, divisions, and subsidiaries to another corporation. For HPT, since they have just acquired TA, they have no reason to sell it unless there is a bigger profit than the sum of acquisition cost and the spin-off benefit. Issuing tracking stock –no legal separation or transfer of assets from HPT to TA First, issuing tracking stock will dilute the shareholders’ ownership.
Instead, new spun off stock has no equity claim on the assets or cash flows of the old parent company (HTP). Second, for tax consideration, issuing tracking stock won’t help HPT to avoid tax. Third, overvalued market moods. if the investors are over-optimistic about the industry of TA, HPT can take advantage of it and have higher capital gain. But there is no evidence that investors have such mood about the TA industry. 3. Number of shares outstanding = 8628425(Exhibit 4), price per share=29 Equity value = shares outstanding * price= $250224325.
There is no debt for new TA, cash equals $213205000 (Exhibit 7) Capital lease obligation = $105252000 (Exhibit 7). 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. 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= $39. 64 2) DCF method (see Excel) 5. After the spin-off, New-TA has no debt outstanding so that it is easy to finance in the future operation. On top of that, the company’s leverage is low, which decreases the default risk of the company by and large.
HPT retains its real estate and gives its operating business to the New TA, hoping that the New TA could focus on the its strong point and develop more aggressively in the market. Besides, there will generate some tax beneficial due to the spin-off transaction, which increases net income of the company. In addition, gross margins of New-TA are incredibly high, encouraging the company to grow at a faster speed and generate large amount of gross profits.
