Case Write-up on Hudson General
Evaluate the value of assets
The major adjustments in the above evaluation is to decide the intrinsic value of two subsidiaries (Hudson LLC and Kohala JV) invested by HGC.
First of all, HGC owns 74% stake in Hudson LLC (HLLC), the book value of which put on the balance sheet was $22 million. This means the value of the total HLLC would be at around $30 million. But on the other hand, we know that Lufthansa paid $23 million for 26 percent stake in HLLC two years ago and was going to offer an additional $30 million to further increase its share to 49 percent. If we take the latest offer price as the market price for HLLC, it will be valued at $130 million, the amount much higher than the value on HGC’s balance sheet. Moreover, HLLC had been generating pretty stable earnings during the past 3 years. No need to mention that the company was significantly under-levered (no debt) and capable of maintaining the same level of earnings since its business were secured by long term business contracts with clients. Therefore it’s reasonable to mark up the asset value of HLLC in order to reflect the real benefits of holding stakes in this investment.
Secondly, for the Kohala JV (KJV), we find out from the annual report that it did not turned out to be a worthy investment for HGC. A huge write-down of the assets in 1997 plus annual operating losses must devalue the asset from an investor’s point of view. Additionally, for HGC, a firm with major business in aviation services, operations in recreational real estate business were expected to distract the focus of the management. Considering the deprecation trend of property price on Hawaiian island, HGC’s 50% ownership of the land must be discounted to match the fair value of the asset. We chop off half of its book value in the above calculation.
After these two major adjustments, the result reveals significant difference between the reproduction value and book value of the assets, implying...