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 company faces
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, MC's debt continuously had increased. Project Chariot could
make some opportunities for HMC and MII. For HMC, it would be under less pressure of
selling off the hotels at lower price from other investors. On the other hand, the MII
does not take a lot of debts, and it would have the ability to raise additional capital and
finance growth.
➢ Looking at the numbers in Exhibit 5 Cash Flow from operating activities just experienced
a drop in 1990. In 1991 they were back up to $552 (millions of dollars). Furthermore by
issuing the convertible preferred stock of $195 in 1991 the number of cash and
equivalents, end of year went down, but would have been up at $229.
➢ As mentioned before the stockholders would gain from the change, since no cash would
actually be transferred. It will also diversify the portfolio. Looking at the secured
investment in the case Host Marriott Corporation will default on its debt.
➢ The returns of the bondholders are now attached to a heavily indebted firm with
massive leverage in comparison with its parent company. The lower security rating to
show for it (from a BBB - Adequate capacity to pay for Marriott Corporation, to a single
B - Greater vulnerability to default, but currently has capacity to pay for Host Marriott
Corporation. Bondholders were never informed of such corporate restructuring plans
before they bought bonds from Marriott when it is arguable that the corporation must
have already been planning months before for such a major move. The central issue
now is that bondholders' wealth was expropriated in favor of stockholders and it is
natural that the both parties act in the way they did.
Recommendation and Conclusion
According to the above calculation it becomes obvious that by adopting "Project
Chariot" have its advantages and disadvantages. The value of the company is much higher with
the restructuring. Beginning debts might be high in comparison with the profits, something that
usually happens when adopting a new system. However, in the long run the situation turns
around and the company can start to gain benefits. With making two companies out of one, the
debt issue is also divided. While MI can start with basically no (or lower) debt, HMC will take
over the old debt from MC, which makes at least one of the two more profitable. Furthermore,
the cash flows mentioned will propel HMC so far that it will be more than adequate to cover
the debt in the future. Looking at the Stockholders, who will gain from this new project,
through diversification of the portfolio, the only negative thing that would leave us, would be
the bondholders.
The greatest risk associated with Project Chariot appears to be the fact that HMC would
assume almost the entire existing debt burden associated with the existing organization, while
MII, with the greatest cash flow potential would emerge essentially debt free. While this
strategy may bode well for MII, HMC emerges from Project Chariot as a debt encumbered
entity with an anticipated net loss of $66 million annually. The primary sources of the existing
long-term debt of the Marriot Corporation have been issued in the form of secured and
unsecured bond notes. Project Chariot does little to address the impact of the organizational
restructuring on bondholders. While management seems confident that the emerging HMC
firm will sustain enough financial strength to make all payments to bondholders, the negative
net revenues are likely to result in a reassessment by the bond rating agencies. It appears likely
that the ratings for existing bonds will be lowered to below investment grade due to the
increased investment risk which will require some institutional creditors to sell their holdings.
In conclusion Project Chariot should be implemented at Marriott Corporation after
careful consideration of Bond Risk. The management can consider distributing the debt in MII
and HMC a little more fairly so as the overall debt burden do not affect the bond rating
subsequently. MC has been for years a very successful business and impressed not only its
shareholders, but also the public interest with positive business doing. Changes are definitely
needed in the company due to its high debt due to systematic risks, as economic breakdown in
the real estate market as well as several different Tax Acts that threw MC back for a bit, but not
as much so that they will have to stop continuing business. Diversifying its product line, if one
can say so, meaning by implementing MI and HMC, will make the MC just more competitive in
their field and it will help them get up the economic ladder faster.
Quantitative Data
1. The following table provides a break-down of some critical information comparing the
value of the existing firm MC and the two firms proposed, HMC and MII, proposed by
Project Chariot:
MC
HMC
MII
Number of Employees
202,000
23,000
182,000
Equity
$679,000,000
$600,000,000
$800,000,000
Debt
$2,979,000,000
$2,000,000,000
$400,000,000
Value
$3,658,000,000
$2,600,000,000
$1,200,000,000