15 Pages Posted: 21 Oct 2008
This case is a relatively straightforward exercise in valuing a potential acquisition target. The case affords students an opportunity to use both discounted cash flow and multiples in their analyses. In addition, at the instructor's discretion, students can do a simple valuation of an option contract and analyze currency choice in a debt issue. The latter two objectives arise if the case is used as an examination. Case Exhibit 1 poses the relevant questions for student preparation.
Chris Smith looked at the memo again (Exhibit 1). Smith had joined CHN Incorporated just weeks earlier, and now faced his first major project. Should CHN consider the purchase of Hope Enterprises, and if so, at what price? Purchase of Hope's world-class casino-hotels and other gambling properties could enhance CHN's position in the gaming business.
CHN was a publicly traded company with a long history in the hotel business. CHN owned, managed, or franchised hotels (under the brand name Carter) across the United States and abroad. The Carter name was recognized internationally as synonymous with quality hotels. Its prime hotels included the Carter Plaza (New York), the Carter Beverly (Los Angeles), and the Carter Hawaiian Village. In addition, CHN owned five casino-hotels in Nevada (two in Reno and three in Las Vegas), one in Australia, and one in Turkey. CHN's worldwide holdings comprised 195 hotels, of which 150 were franchised. Of these, CHN's casino-hotels had 11,000 rooms (85% occupancy rate) and its nongaming properties had 71,000 rooms (71% occupancy). Casino-hotels were generally large facilities generating revenues from both room rentals and gambling. In 1995, approximately 55% of CHN's revenues (and 45% of its operating profits) were from casino-hotels. At one point, CHN considered spinning off its gambling segment, but new management was reconsidering.
CHN's new president and CEO, Jane Scarret, had recently taken over from long-time CEO Francis Carter-Hellman, a member of one of CHN's founding families. Carter-Hellman remained the chair, and 25% of CHN's stock was owned by officers and directors (some of whom were family members). Scarret was well regarded in the financial community. According to one analyst, Scarret brought “the reputation of an astute finance person who would be able to create value—enhancing initiatives for the company.” CHN's recent share price of $ 100 seemed to reflect this market confidence in Scarret.
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Keywords: discounted cash flow, acquisitions, mergers, valuation
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