The following is an analysis of the Travel Centers of America (TA) and recommended best investment strategies as Trifthorn Capital pertains to additional investment opportunities. Based on HPT-TA deal structures and where we believe our investors to be headed we recommend the following actions:
• Holding New-TA stocks you received in the spinoff
• Buying shares in New-TA in addition to the stocks received from spinoff
In this memo, we would analyze the HPT share holders’ benefit from acquisition, noting that the company’s restructuring plan have allowed Travel Centers of America to run business without being exposed to financial risk from high leverage or less cash. We will then analyze the deal structure by comparing our own calculation using comparable and DCF with HPT’s original deal structure. And we figure out the acquisition cost of $1.9billion was plausible.In addition, we provide a detailed valuation on new-TA’s future with comparable analysis, DCF and other methods, showing that the new-TA can become a successful and profitable investment for our investors.Finally, we talk about risk factor regarding conflict of interest between two companies and further possibility of unfavorable action on TA by HPT management.
1. After its USD 1.9billion acquisition of Travel Centers of America (TA), the Hospitality Properties Trust (HPT) keeps most of TA’s properties and leased them back to the new, publicly traded company (New TA). To HPT, this complex transaction has some strategic advantages. First, with the complex structure, HPT could retain its status as a REIT and avoid paying federal income taxes. To preserve its tax free status, a REIT has to collect all of its income and has all of its assets in real estate. Second, HPT could make stable revenue structure. Since hotel industry is highly cyclical, HPT was in need to buy new investment portfolio which can offsets revenue fluctuation.
As a nation’s leading service travel centers, Travel Centers America had well diversified business and has made relatively stable gross profit. By acquiring TA and spun it off, HPT is expecting to receive $170millions of annual rent income for 16years. Third, from this deal, shareholders of HPT would be benefited to own shares in two companies further expecting more dividends while creating a captive stream of rentals from the Travel Centers operation. Based on our valuation using 9.5 times of EBITDA multiple, the fair value of TA before acquisition is $1.83 billion.
Among two comparable multiples, we used 9.5 times multiple from comparable CASY because CASY’s General Stores owned the real property which is used for operation just like the Old-TA. In our discounted cash flow model, the fair value of Old-TA (before acquisition) is $1.7billion with 7.7% of cost of capital. To arrive at our valuation, we consider Pro Forma Balance Sheet as basis and subtract post acquisition items such as $213million from HPT from Cash and Shareholder’s Equity and $105million capital lease obligation from Liabilities. Based on our scenario, we believe that $1.9billion of acquisition price HPT paid for this transaction seems little bit positive but is understandable. (Exhibit 1)
2. Based on our multiple valuations using 8.1 times of EBITDA multiple, the fair value of New-TA is $267 million. Our discounted cash flow method calculated the fair value of New-TA as $243 million with 9.3% of cost of capital. (Exhibit 2) Since the amount of capital lease is non-balance sheet liabilities, we use $1.27 billion of NPV of lease payment as debt amount. (Exhibit 3) By the way, the enterprise value of New TA would be $147million, if we use the market price of $29 on February 1 2007. (Exhibit4)
3. 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.
4. Based on our DCF valuation, the intrinsic value of New TA stock is $39.86 per share (Exhibit 2) which is higher than $29 on Feb-1-07. We recommend our investors buying TA stock because equity value is underpriced than its intrinsic value and has potential to increase.
5. For a company with separate operating entity and owner, conflict of interest is always an issue. Recent announcement of new senior management, Mr. O’Brien who is also an employee of REIT management, shows the risk of further competition between shareholder of HPT and TA.