Dr. Smith had joined CHN Inc just weeks earlier, and now faced his first major project: Should CHN consider the purchase of Lively Enterprises, and if so, at what price? Purchase of Lively’s world-class casino-hotels and other gambling properties could enhance CHN’s position in the gaming industry.
CHN was a publically traded company with a long history in the hotel business. CHN owned, managed or franchised hotels (under the brand name Carter) across globe. The Carter name was recognized internationally as synonymous with quality hotels. 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 nonmanaging properties had 71,000 rooms (71% occupancy). Casino-hotels were generally large facilities generating revenues from both room rentals and gambling. At one point, CHN considered spinning off its gambling segment, but new management was reconsidering. CHN’s recent share price of $ 100 seemed to reflect the market confidence in the new management of the company.
Lively Enterprises owned and operated three world-class casino-hotel resorts. Exhibits provide financial information on Lively. One question was whether market players like Lively could compete effectively without the aid of powerful reservation systems used by larger hotel chains like Hilton and CHN.
Exhibit contains Dr. Smith’s initial projections for Lively as a stand-alone. The five year revenue growth seemed attainable for Lively, since the industry was growing by 15%.Dr. Smith had forecast this revenue growth based on capacity increase, an increase in occupancy rates, and price increases that mirrored general inflation. His rough guess was that, by the end of five years, the first two sources of growth would be exhausted without substantial investment. If CHN bought the business, Dr. Smith thought margins might be...