Restructuring

Introduction

The purpose of this report is to present the analysis and suitable recommendations towards the

decision of whether Project Chariot should be implemented at Marriott Corporation (MC) or not. This

project involves splitting up the company into two separate entities, Marriott International Incorporated

(MII) and Host Marriott Corporation (HMC) in order to minimize debt and improve the financial health

of the company after severe effects from real estate market crash and slowdown in the business. The

description of Marriott Corporation, key issues faced by the corporation, details about the proposed

Project Chariot and the alternatives and consequences of implementing Project Chariot is reported in the

following sections. Finally, with the support of financial data supplied in the case, suitable

recommendations are mentioned in the last sections of the report.

Description of firm and situation

J. W. Marriott Sr. founded the Marriott Corporation (MC) in 1927 and shaped the company’s

path towards huge growth and success. Marriott’s main strategy in those days was to develop hotel

properties around the world and sell these properties to outside investors while retaining long-term

management contracts. MC was a conservative company and it stressed the themes of careful attention to

details, the organization and its employees. Quality was one of the highest priorities set by the founder

himself. In 1953 MC went public, selling one-third of its shares in its Initial Public Offering. Although

they continued to sell public stock, the Marriott family always kept 25% ownership over the business. J.

W. Marriott Sr. resigned in 1964, and his son J. W. Marriott Jr. took over from then and immediately

took a diversion from his father’s conservative financial policies. In the 1970s MC began to use bank

credit and unsecured debt instead of mortgages to the finance development which was considered
beneficial at that time due to substantial higher cash flows than the interest charges. Later, MC

experienced two financial crises, which were due to limited partnerships in 1989, where MC

experienced a sharp drop in income and the 1990 real estate market crash. This resulted in MC’s stock

prices to fall more than two-thirds, which means a drop of $2 billion in market capitalization. This was

the first time that investor-owned Marriott hotels went bankrupt.

Key issues that the decision maker must address

In order to improve and bring back the financial stability and also improve the financial

condition of MC, the then CFO proposed restructuring the company under a project named Project

Chariot. This case deals with the analysis of the financial condition of MC and setting up relevant

background information, financial data and other considerations required to analyze the pros and cons of

implementing Project Chariot at MC.

Due to the economic downturn in the early '90s and the Tax Reform Act of 1986, MC had limited ability

to raise funds. This resulted in large interest payments on property, which basically left Marriott

Corporation with lots of debt. This left the organization with nothing but a fast restructuring of its debt

policy and with it a restructuring of the company itself. Stephen Bollenbach, the new chief financial

officer, planned on doing this change by inventing Project Chariot. Under Project Chariot, MC would

become two separate companies. One is called Marriott International, Inc (MII), which would comprise

MC's lodging, food, and facilities management businesses. The other one was to be named Host Marriott

Corporation (HMC), which would retain MC's real estate holdings and its concessions on toll roads and

at the airports.

Discuss any important constraints or opportunities that the

Under Project Chariot, MII and HMC would have different and independent management teams.

For MII, this means that the new spin off would include little long term debt and therefore more it would
be more profitable, whereas for HMC this separation would mean that they would retain the real estate

holdings, including retaining the most of the long term

debt from MC. To every upside there is a downside and in this case the bondholders would not be

satisfied with this move. This split would lead that bond rating agencies would lower MC's long-term

bonds to a level below investment grade, whereas the stockholders will very likely benefit from this new

project. By saying this, leveraged buyouts (LBOs) had provided stockholders, in the past, with large

profits from tender offers at premium prices, while creating losses for bondholders in the reduced market

value of their newly speculative investments. So called "event-risk" covenants would have blocked

Project Chariot or at least required any measures to protect bondholders from its potentially adverse

effects, which they often did so, but at the cost of lower interest.

Discuss the alternatives available to management

The management could either choose to go with Project Chariot and split the company into two

separate entities or they could stay within the same structure and try to improve the financial condition

of the company. In order to choose the best solution to this problem the financial statements and data of

the company is studied.

 Based upon MC's historical financial information for 1991, the value of

the company is estimated at $3,658,000. The same calculations can be done for the two companies

formed from the Project Chariot spin-off: HMC and MII based upon a projected pro forma basis, equity

and debt figures for the two new entities. HMC's value is estimated at $2,600,000,000 and MII's value is

estimated to be $1,200,000,000.

 The key element in the restructuring plan was that HMC was to keep

the debt associated with its assets, rounding to about $2.9 billion. Marriott International would then only

have modest debt after restructuring. To help alleviate HMC's position, MII was to provide a $630

million line of credit to HMC, though the expiration date of the line was sooner than the maturities of
many of the bond issues outstanding. It is important to know that by transferring debt the company will

improve their efficiency. Since the end of the 1980's,