Lively Enterprises

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 Inc

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

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.

Deal Considerations

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 improved by taking advantage of
CHN’s existing expertise. He felt relatively sure that SGA could be reduced by 1% of sales,
compared with Lively’s historical performance, and believed that saving could reach 2% of
sales. The last source of synergy was sales growth, which he believed could be accelerated to
12% for the next five years by aggressive use of CHN’s reservation system.

While Lively was an attractive target, no other suitor had appeared. Was this lack of activity
telling him that Lively properties were over priced? What if contemplated margin improvements
fell short of expectations? Lively had traded for more than $ 30 a share a few years ago, before
it experienced down years that led to the current $15 price. Could Lively rebound to double its
current share price?