What is ELI’s Investment Strategy and do you think that the acquisition of the Hotel Perennial fits with that strategy? Why or Why not?
ELI’s Investment Strategy:
In order to make a fruitful investment, the firm analyses the complete portfolio of the entity in which investment is to be made. The firm comprehensively analyses the entity’s position in the market, its strength and weaknesses as well as the firm also analyses the opportunities available for the entity in the market and the perceived threats to the entity.
Moreover, the firm also analyses the viability of the project to be undertaken by calculating the future cash flows of the entity. If the cash flows of the entity are such that the present value of such cash flows out ranges the cost associated with such project with a wide-spread margin, then the firm considers investing in such a project, as the firm considers that the project has enough strength to pay off handsome returns.
Moreover, EL investment uses syndication strategy, in which the firm invites other potential investors to invest in such project, which enables the company arrange the funds for the project easily, efficiently and effectively. In addition, if the project is such that it does not require huge capital amount, then the firm solely funds such project.
Suitability with Perennial Hotel:
The investment strategy of the firm does not suit with the Perennial Hotel because the 3 hotels in which the firm has invested prior to considering the project of Perennial Hotel which was a highly reputable hotel and was flagged as a luxury hotel, whereas, Perennial Hotel was classified as an economy class hotel by its last owner.
Moreover, the hotel does not have any potential synergies, which is also inconsistent with the investment strategy of the firm. In addition, the firm also considers the position of the hotel as well as potential of the project to generate future cash flows, which is inconsistent with the project of Perennial Hotel.
If you were advising DJ on his acquisition, what should he bid for the hotel? Use a DCF calculation and provided assumptions to determine a value.
The calculation performed in exhibit 1 shows that DJ should bid less than $12.5 million. Moreover, WACC is assumed to be 15% in order to arrive at the maximum bid price.
Calculate the projected un levered IRR, un levered cash flow multiple, levered IRR and levered cash flow multiple for the investment, assuming Jameson purchases the hotel at your recommended valuation from question 2.
A comprehensive calculation has been done with this respect in exhibit 2.
What are the potential opportunities and challenges for ELI in acquisition of the Hotel Perennial from a firm perspective?
Potential Opportunities
Due to the current economic recession, the GDP rates have decreased, which has subsequently decreased the acquisition price of the hotel that has created an opportunity for the firm that it could be acquired at a low cost and it would be subsequently sold at a higher price.
Moreover, there are large numbers of rooms in the entire hotel, and since the demand in the Chicago market for hotel rooms has been increasing provides an opportunity for the firm that the demand for the Hotel would be increased in future.
Potential Challenges:
The hotel has not been in an operational condition for a period of more than three years, which creates challenge to the firm that if it acquires the hotel, whether it would sustain after re-opening or not. The perfect positioning in the market for the hotel is also a challenge for the firm along with determining the right cost for reopening, which is another issue for the firm.
Moreover, inviting the prospective investors including bank for funding the project as well as regaining the reputation of the hotel is also a challenge for the firm in acquisition of Perennial Hotel. In addition to this, there are many well established hotels in the market, which makes it challenging for the firm to enhance the competitiveness of the hotel in order to compete strongly in the entire market as well as in order to secure a leading position in the entire market. Furthermore, there is also a challenge for the firm to run the hotel efficiently and effectively in the recent economic crisis...................
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