3.Respond to question 2 posed by CEO Jane Scarret in Exhibit 49.1. (Use Exh TN4 to find the value of the merger using synergies discussed in the question).
FIN 432 Case report 10 Carter international Qw Search Sheet Home cert Draw Page Layout Formulas Data Review View Share Comments X IP 22 AA waste Custom Times New Roman BIU 27.0 Pete NAX B Werge Devin $ % Condos Format Cod Format Hind Select 4 x S C M N 0 R S D 24.0% 23.0% 22.1% 21.5% 1 18.8% 20.796 T6.79 A Operating margin 21 24 Valuation 25 WACC Long-term growth 7.5% 34 Rev Giro Gain CRAgain 2015 2016 2012 2013 2012 2920 2022 2023 30 31 Networking capital Net PPR 954.5 33 24 35 36 37 s Cirowth Sales Gross profit (me gross margin) GRA% (with synergies) GEA EDIT NOPAT delle NWC -delte PPR RCH 39 40 43 Discounted cash flow Enl. value 46 Ey value Shares Price 50 Exh TNS ENS ETNE Eth Select ENTER 17 FIN 432 Case report 10 Carter international Qw Search Sheet Home cert Draw Page Layout Formulas Data Review View Share Comments X IP Times New Roman 72 AA waste Cum NEX 27.0 Pete OLA Berge & Cente S. % Condition Form Cod Formatting Tools Format Hindi Select cias A C D E H ! M N 0 R 5 1 Exhibit TN 2 CARTER INTERNATIONAL 1 Merger Valuation for Hope Enterprises (dollars in millions) 4 5 Forecast 2015 2016 2017 2018 2019 2020 2021 2022 79 0.50 8 9 10 11 12 Revenue growth Cost of goods sold revenue General and admin NWC tumover PPR over 7% 0.51 0,20 $8.50 0.90 0.52 0.20 62.50 0.95 7% 0.53 0,20 66.50 0.97 0.54 0.20 66.50 0.97 5% 0.56 0.20 66.50 0.97 3% O.SK 0.20 66.50 0.97 55.50 0.86 788 1.149 902 460 1,033 547 57 1.184 687 60 14 15 16 17 18 19 20 21 Revenue Cost of goods sold Depreciation expense Gross proti General and admin Operating pro 543 422 51 371 169 202 965 502 57 406 193 213 1.095 591 SX 446 219 227 10 205 207 222 2:10 216 237 197 Cross margin Operating margin 44.0 24.0% 41.5 21.5% 23.0% 40.2% 20.7% 3.8% 18.8% 36.7% 16.7% 22 7.54 21 Valuation 25 WACC 27 Long-term growth 28 29 30 Networking capital NetPPAR Rev Cire Cain G&Again 54 40% 2015 2016 2017 2018 2019 2020 2021 2023 Eh TNS ETNE Select ENTER 17 Exhibit 6 CARTER ENTERPRISES Financial Projections for Hope Enterprises (dollars in millions) 2016 2017 2018 2019 2020 2021 2022 Revenue growth Cost of goods sold/Revenue General and admin/Revenue NWC turnover PPE turnover 7% 0.50 0.20 55.5 0.86 7% 0.51 0.20 58.8 0.90 7% 0.52 0.20 62.5 7% 0.53 0.20 66.5 0.97 6% 0.54 0.20 66.5 0.97 5% 0.56 0.20 66.5 0.97 3% 0.58 0.20 66.5 0.97 0.95 Revenue Cost of goods sold Depreciation expense Gross profit General and admin Operating profit 843 422 51 371 169 202 902 460 54 388 180 208 965 502 57 406 193 213 1,033 547 57 428 207 222 1,095 591 58 446 219 227 1,150 644 60 446 230 216 1,184 687 63 434 237 198 Note: NWC turnover is defined as Revenue/Net Working Capital; PPE turnover is defined as Revenue/Net PPE. Source: Case writer Exhibit 5 CARTER ENTERPRISES Financial Market Conditions Market Bond Yields - January 2016 USD GBP Maturity 1 year 2 year 3 year 4 year 5 year 30 year Government Bond Yields 0.47% 0.23% 0.67% 0.34% 0.78% 0.47% 0.98% 0.55% 1.16% 0.77% 2.75% 2.37% A Baa Corporate Bond Yields 3.97% 4.16% 4.38% 5.46% 6.10% 6.90% Ba B Market Risk Premium Consensus premium used within Carter 5.0% Foreign Exchange Rates US Dollar to British Pound (USD/GBP) 1.44 Economic Indicators for the United States Annual real GDP growth Annual GDP Deflator (Inflation) National Unemployment Rate Five Year Forec 2.9% 2.7% 5.0% Exhibit 4 CARTER INTERNATIONAL Balance Sheet for Hope Enterprises ($ millions) Dec 2014 Dec 2015 Assets Cash and cash equivalents Receivables less allowance for doubtful accour Deferred income tax benefits Prepayments and other Inventories Total Current Assets 63.6 35.3 12.1 12.9 10.3 134.3 67.8 36.9 13.1 14.5 10.8 143.0 PP&E, net Deferred costs and other Other assets Total Assets 893.8 40.3 165.5 1,233.8 954.51 42.4 161.8 1,301.7 Liabilities and Stockholders' Equity Accounts payable Construction payables Accrued expenses Current portion of long-term debt Total Current Liabilities 27.8 14.8 71.1 12.5 126.3 33.5 16.4 79.0 9.4 138.4 Long-term debt Other liabilities Deferred income taxes Total Liabilities 702.9 18.2 12.9 860.3 693.5 22.7 14.4 869.0 Common stock Additional paid-in capital Retained earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 32.7 214.4 126.3 373.5 1,233.8 32.7 214.4 185.6 432.7 1,301.7 Exllibit 3 CARTER INTERNATIONAL Income Statement for Hope Enterprises ($ millions, except per share fi 2014 2015 Revenue Casino Rooms Food and beverage Other Gross Revenue Promotional Allowances Net Revenue 460.8 112.0 111.2 92.2 776.2 -38.1 738.1 493.1 119.9 118.8 96.9 828.7 -40.8 787.9 Expenses Casino Rooms Food and Beverage Other General and Administrative Depreciation and Amortization Total Expenses 177.9 42.0 89.3 46.1 156.2 42.4 553.9 188.6 45.0 94.8 51.0 162.0 45.3 586.7 184.2 201.2 Operating Income Interest Expense Income before Taxes Provision for Income Taxes Net Income 55.7 128.5 44.4 156.8 38.1 90.4 44.3 112.5 Earnings per Share 1.38 1.56 Shares Outstanding 65.5 72.1 Ehibit 2 (Continued) CARTER INTERNATIONAL Financial Summary Data on Companies in the Hotel and Gaming Industry (Financial Statement Data as of 2015 in millions) Gaming Las Vegas Sands MGM Resorts Penn National Gaming Wynn Resorts Revenue Total Debt $11,688 $9,128 $9,250 $12,821 $2,825 $1,261 $4,105 $8,780 Market Equity $32,518 $10,697 $1,134 $6,369 Book EBITDA Equity Margin $6,930 41.3% $5,840 32.5% $645 33.5% -$50 32.0% EBIT Interest Margin Expense 32.8% $275 23.5% $850 27.5% $70 24.0% $420 Bond Beta Rating 1.35 Baa 1.65 B 1.40 B 1.75 B Ba B Baa Hotels Choice Hotels Hilton Worldwide Hyatt Hotels Marcus Marriott International Starwood Hotels Wyndham Worldwide Carter International $845 $11,430 $4,325 $488 $14,530 $3,045 $5,500 $1,500 $818 $10,193 $1,377 $242 $4,304 $2,140 $5,183 $742 $2,434 $18,315 $5,224 $580 $15,996 $10,478 $7,540 $4,500 -$380 $5,220 $4,000 $346 -$3,460 $1,310 $1,300 $1,574 30.4% 29.0% 20.7% 28.1% 11.5% 42.9% 27.9% 29.2% 29.0% 23.0% 13.5% 20.2% 10.5% 33.5% 23.5% 25.0% $39 $550 $45 $12 $165 $100 $110 $37 0.85 1.20 1.10 1.05 1.10 1.00 1.25 1.00 Baa Baa B A Exhitlit 2 CARTER INTERNATIONAL Financial Summary Data on Companies in the Hotel and Gaming Industry Financial Statement Data as of 2015 in millions) Company Hotel Rooms (000s) Gaming Space (000s of sq. ft.) Operations Las Vegas Sands 20 1900 Casino resorts in Macao, Singapore, and United States. MGM Resorts 52 2200 15 casino resorts in the United States and a stake in a casino in Macao. Penn National Gaming 3 NA 26 gaming facilities in United States. Company facilities feature 26,000 gaming machines. Wynn Resorts 300 Casino resorts in the United States and Macao. Choice Hotels 500 Hotels under the Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites names. Hotel and resorts worldwide under the Hilton, Conrad, Embassy Suites, Hilton Garden Inn, Hampton Inn, and Homewood Suites names. Hilton Worldwide 715 Hyatt Hotels 155 Hotel, resort, and vacation housing worldwide. Marcus NA Operates hotels, resorts, and movie theatres in the United States. Marriott International 714 Starwood Hotels 350 Operates or franchises hotels and resorts worldwide under the Marriott, Courtyard, Residence Inn, Ritz Calrton, Renaissance names. Hotels under the Sheraton, Le Meridien, Westin, St Regis, and W names. Hotels under the Wyndham, Ramada, Days Inn, Super 8, names. Also a major operator of vacation time-share properties Wyndham Worldwide NA Source: Value Line Investment Survey 2. Quantify the value that Carter brings to Hope. The purpose of your valuation is to educate the team on figures that will be helpful in developing a bidding strategy. There is a con- sensus that Hope would get a healthy bump in both revenue growth and operating mar- gin. The view is that an acquired Hope would achieve: Annual revenue growth expansion of five percentage points starting in 2017 (e.g., revenue growth in 2017 expanding from 7% in the base case to 12% in the merger scenario. Future years would get similar bumps in revenue growth.) A 30% to 50% reduction in Hope's general and administrative expenses starting in 2017. There is some discussion about whether these gains should be included beyond 2021. We would appreciate your perspective on the value implications of this decision. Also, how important is the realization of each of these two gains in the value of the merger? FIN 432 Case report 10 Carter international Qw Search Sheet Home cert Draw Page Layout Formulas Data Review View Share Comments X IP 22 AA waste Custom Times New Roman BIU 27.0 Pete NAX B Werge Devin $ % Condos Format Cod Format Hind Select 4 x S C M N 0 R S D 24.0% 23.0% 22.1% 21.5% 1 18.8% 20.796 T6.79 A Operating margin 21 24 Valuation 25 WACC Long-term growth 7.5% 34 Rev Giro Gain CRAgain 2015 2016 2012 2013 2012 2920 2022 2023 30 31 Networking capital Net PPR 954.5 33 24 35 36 37 s Cirowth Sales Gross profit (me gross margin) GRA% (with synergies) GEA EDIT NOPAT delle NWC -delte PPR RCH 39 40 43 Discounted cash flow Enl. value 46 Ey value Shares Price 50 Exh TNS ENS ETNE Eth Select ENTER 17 FIN 432 Case report 10 Carter international Qw Search Sheet Home cert Draw Page Layout Formulas Data Review View Share Comments X IP Times New Roman 72 AA waste Cum NEX 27.0 Pete OLA Berge & Cente S. % Condition Form Cod Formatting Tools Format Hindi Select cias A C D E H ! M N 0 R 5 1 Exhibit TN 2 CARTER INTERNATIONAL 1 Merger Valuation for Hope Enterprises (dollars in millions) 4 5 Forecast 2015 2016 2017 2018 2019 2020 2021 2022 79 0.50 8 9 10 11 12 Revenue growth Cost of goods sold revenue General and admin NWC tumover PPR over 7% 0.51 0,20 $8.50 0.90 0.52 0.20 62.50 0.95 7% 0.53 0,20 66.50 0.97 0.54 0.20 66.50 0.97 5% 0.56 0.20 66.50 0.97 3% O.SK 0.20 66.50 0.97 55.50 0.86 788 1.149 902 460 1,033 547 57 1.184 687 60 14 15 16 17 18 19 20 21 Revenue Cost of goods sold Depreciation expense Gross proti General and admin Operating pro 543 422 51 371 169 202 965 502 57 406 193 213 1.095 591 SX 446 219 227 10 205 207 222 2:10 216 237 197 Cross margin Operating margin 44.0 24.0% 41.5 21.5% 23.0% 40.2% 20.7% 3.8% 18.8% 36.7% 16.7% 22 7.54 21 Valuation 25 WACC 27 Long-term growth 28 29 30 Networking capital NetPPAR Rev Cire Cain G&Again 54 40% 2015 2016 2017 2018 2019 2020 2021 2023 Eh TNS ETNE Select ENTER 17 Exhibit 6 CARTER ENTERPRISES Financial Projections for Hope Enterprises (dollars in millions) 2016 2017 2018 2019 2020 2021 2022 Revenue growth Cost of goods sold/Revenue General and admin/Revenue NWC turnover PPE turnover 7% 0.50 0.20 55.5 0.86 7% 0.51 0.20 58.8 0.90 7% 0.52 0.20 62.5 7% 0.53 0.20 66.5 0.97 6% 0.54 0.20 66.5 0.97 5% 0.56 0.20 66.5 0.97 3% 0.58 0.20 66.5 0.97 0.95 Revenue Cost of goods sold Depreciation expense Gross profit General and admin Operating profit 843 422 51 371 169 202 902 460 54 388 180 208 965 502 57 406 193 213 1,033 547 57 428 207 222 1,095 591 58 446 219 227 1,150 644 60 446 230 216 1,184 687 63 434 237 198 Note: NWC turnover is defined as Revenue/Net Working Capital; PPE turnover is defined as Revenue/Net PPE. Source: Case writer Exhibit 5 CARTER ENTERPRISES Financial Market Conditions Market Bond Yields - January 2016 USD GBP Maturity 1 year 2 year 3 year 4 year 5 year 30 year Government Bond Yields 0.47% 0.23% 0.67% 0.34% 0.78% 0.47% 0.98% 0.55% 1.16% 0.77% 2.75% 2.37% A Baa Corporate Bond Yields 3.97% 4.16% 4.38% 5.46% 6.10% 6.90% Ba B Market Risk Premium Consensus premium used within Carter 5.0% Foreign Exchange Rates US Dollar to British Pound (USD/GBP) 1.44 Economic Indicators for the United States Annual real GDP growth Annual GDP Deflator (Inflation) National Unemployment Rate Five Year Forec 2.9% 2.7% 5.0% Exhibit 4 CARTER INTERNATIONAL Balance Sheet for Hope Enterprises ($ millions) Dec 2014 Dec 2015 Assets Cash and cash equivalents Receivables less allowance for doubtful accour Deferred income tax benefits Prepayments and other Inventories Total Current Assets 63.6 35.3 12.1 12.9 10.3 134.3 67.8 36.9 13.1 14.5 10.8 143.0 PP&E, net Deferred costs and other Other assets Total Assets 893.8 40.3 165.5 1,233.8 954.51 42.4 161.8 1,301.7 Liabilities and Stockholders' Equity Accounts payable Construction payables Accrued expenses Current portion of long-term debt Total Current Liabilities 27.8 14.8 71.1 12.5 126.3 33.5 16.4 79.0 9.4 138.4 Long-term debt Other liabilities Deferred income taxes Total Liabilities 702.9 18.2 12.9 860.3 693.5 22.7 14.4 869.0 Common stock Additional paid-in capital Retained earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 32.7 214.4 126.3 373.5 1,233.8 32.7 214.4 185.6 432.7 1,301.7 Exllibit 3 CARTER INTERNATIONAL Income Statement for Hope Enterprises ($ millions, except per share fi 2014 2015 Revenue Casino Rooms Food and beverage Other Gross Revenue Promotional Allowances Net Revenue 460.8 112.0 111.2 92.2 776.2 -38.1 738.1 493.1 119.9 118.8 96.9 828.7 -40.8 787.9 Expenses Casino Rooms Food and Beverage Other General and Administrative Depreciation and Amortization Total Expenses 177.9 42.0 89.3 46.1 156.2 42.4 553.9 188.6 45.0 94.8 51.0 162.0 45.3 586.7 184.2 201.2 Operating Income Interest Expense Income before Taxes Provision for Income Taxes Net Income 55.7 128.5 44.4 156.8 38.1 90.4 44.3 112.5 Earnings per Share 1.38 1.56 Shares Outstanding 65.5 72.1 Ehibit 2 (Continued) CARTER INTERNATIONAL Financial Summary Data on Companies in the Hotel and Gaming Industry (Financial Statement Data as of 2015 in millions) Gaming Las Vegas Sands MGM Resorts Penn National Gaming Wynn Resorts Revenue Total Debt $11,688 $9,128 $9,250 $12,821 $2,825 $1,261 $4,105 $8,780 Market Equity $32,518 $10,697 $1,134 $6,369 Book EBITDA Equity Margin $6,930 41.3% $5,840 32.5% $645 33.5% -$50 32.0% EBIT Interest Margin Expense 32.8% $275 23.5% $850 27.5% $70 24.0% $420 Bond Beta Rating 1.35 Baa 1.65 B 1.40 B 1.75 B Ba B Baa Hotels Choice Hotels Hilton Worldwide Hyatt Hotels Marcus Marriott International Starwood Hotels Wyndham Worldwide Carter International $845 $11,430 $4,325 $488 $14,530 $3,045 $5,500 $1,500 $818 $10,193 $1,377 $242 $4,304 $2,140 $5,183 $742 $2,434 $18,315 $5,224 $580 $15,996 $10,478 $7,540 $4,500 -$380 $5,220 $4,000 $346 -$3,460 $1,310 $1,300 $1,574 30.4% 29.0% 20.7% 28.1% 11.5% 42.9% 27.9% 29.2% 29.0% 23.0% 13.5% 20.2% 10.5% 33.5% 23.5% 25.0% $39 $550 $45 $12 $165 $100 $110 $37 0.85 1.20 1.10 1.05 1.10 1.00 1.25 1.00 Baa Baa B A Exhitlit 2 CARTER INTERNATIONAL Financial Summary Data on Companies in the Hotel and Gaming Industry Financial Statement Data as of 2015 in millions) Company Hotel Rooms (000s) Gaming Space (000s of sq. ft.) Operations Las Vegas Sands 20 1900 Casino resorts in Macao, Singapore, and United States. MGM Resorts 52 2200 15 casino resorts in the United States and a stake in a casino in Macao. Penn National Gaming 3 NA 26 gaming facilities in United States. Company facilities feature 26,000 gaming machines. Wynn Resorts 300 Casino resorts in the United States and Macao. Choice Hotels 500 Hotels under the Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites names. Hotel and resorts worldwide under the Hilton, Conrad, Embassy Suites, Hilton Garden Inn, Hampton Inn, and Homewood Suites names. Hilton Worldwide 715 Hyatt Hotels 155 Hotel, resort, and vacation housing worldwide. Marcus NA Operates hotels, resorts, and movie theatres in the United States. Marriott International 714 Starwood Hotels 350 Operates or franchises hotels and resorts worldwide under the Marriott, Courtyard, Residence Inn, Ritz Calrton, Renaissance names. Hotels under the Sheraton, Le Meridien, Westin, St Regis, and W names. Hotels under the Wyndham, Ramada, Days Inn, Super 8, names. Also a major operator of vacation time-share properties Wyndham Worldwide NA Source: Value Line Investment Survey 2. Quantify the value that Carter brings to Hope. The purpose of your valuation is to educate the team on figures that will be helpful in developing a bidding strategy. There is a con- sensus that Hope would get a healthy bump in both revenue growth and operating mar- gin. The view is that an acquired Hope would achieve: Annual revenue growth expansion of five percentage points starting in 2017 (e.g., revenue growth in 2017 expanding from 7% in the base case to 12% in the merger scenario. Future years would get similar bumps in revenue growth.) A 30% to 50% reduction in Hope's general and administrative expenses starting in 2017. There is some discussion about whether these gains should be included beyond 2021. We would appreciate your perspective on the value implications of this decision. Also, how important is the realization of each of these two gains in the value of the merger
