Hardvard Case: TA Answers

1. This is a good allocate for HPTs sh areholders and they did it for several reasons First of all, TAs direct business was spun off for federal income task considerations. To maintain its status as an REIT for tax purpose, a large majority of HPTs gross income had to be generated from real estate rents or mortgage interest. To meet these requirements, HPT was forced to divest itself of TAs operate business.Second, the management of HPT believed that the rental income from TAs sites would significantly diversify its revenue stream by providing painting to a historically recession-resistant industry that did not follow the cyclical patterns of the hotel industry. Finally, the spin-off will unlock the vague care for of TA and the shareholder of HPT will receive shares of TA. As a result, this will create observe for shareholders of HPT. 2. 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 virt ue carve-out ultimately results in the parent company fully spinning off the subsidiary. For HPT, carve-out cant supporter them to avoid tax. Sell-off means divvy uping assets, divisions, and subsidiaries to another corporation. For HPT, since they realise 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 introduce variant 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 wont assistant HPT to avoid tax. Third, overvalued market moods. if the investors are over-optimistic round 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), harm 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. 4. What is the fair value of one share of New-TA? 1) Multiple valuation method acting 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 fade of that, the companys 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 than 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 mar gins of New-TA are incredibly high, encouraging the company to grow at a faster speed and generate large amount of gross profits.