LEADERSHIP & CORPORATE ACCOUNTABILITY.
Marriott Corporation (A) :
Individual submission
on Monday, 20th April 2020,
Prepared by
PROMODKUMAR K P (EPGP-11-084)
1
 Why is Marriott management proposing project Chariot?
What is it trying to accomplish?
Q1
 Project Chariot is a - financial maneuver; a radical restructuring of the MC, that would separate Marriott’s property
ownership and management operations into two distinct companies: HMC and MII, respectively.
 Stockholders of Marriott would receive a share of stock in the new company to match each share they held of MC.
 The project is consistent with Marriott’s focus on contract and management opportunities, which included highgrowth markets such as “lifecare” for senior citizens, and required little capital input. Property ownership, on the
other hand, was suffering from a real estate collapse and industry excess capacity, and was the source of large
interest payments. The restructuring planned by Project Chariot is therefore a way of separating two activities with
different growth dynamics and capital structures (one with very large fixed assets, the other with low fixed assets).
 The main reason of this restructuring is:- by attracting investors to raise new capital, and use this capital to seize
opportunities in the market. As a single entity, Marriott could confuse some investors who had trouble
distinguishing and valuing its property and management activities. As a consequence, Marriott’s stock was
undervalued and this could dissuade potential investors. With two separate entities, however, investors would be
able to choose between two “Pure Plays” (companies with a single business focus) and allocate capital accordingly
(the cost of capital is easier to estimate). Marriott International (MII), with its strong growth prospects, larger cash
flow and lower level of debt (33% of book capital), would be able to attract fresh capital at lower interest rates than
it if it were associated with property ownership, which involves higher capital investment (HMC’s debt would
amount to 76% of book capital). It could use this capital to finance its growth or purchase the assets of struggling
competitors.
 What is the likely impact of project Chariot on the wealth
position of the shareholders?
Q2
 Shareholder’s interests lie in the value of the company.
 The firm’s capital structure (and mix of debt securities) is irrelevant when determining the firm’s value,
assuming perfect capital markets. Viewed from this perspective, we can say that Project Chariot does not
change the size of the pie (the asset side), but rather the way it is sliced. In its immediate aftermath, Project
Chariot would therefore have no effect on the overall value.
 In fact the purpose of Project Chariot is precisely to increase the size of the pie, by allowing for better
access to capital and greater efficiencies in the now “leaner” companies.
 Marriott’s shareholders would receive a share of MII to match each share of MC they already own. This
special stock dividend would be taxfree, and shareholders would benefit from the anticipated
appreciation of MII’s shares.
 With an easier access to credit, MII will be able to expand its business and thus create value for
shareholders.
 Shares in HMC are likely to suffer from the restructuring because the company will be saddled with debt
and will operate at a loss, but the question is whether the gains to be had from MII’s newly created shares
will outweigh this.
 Should Management be concerned by the loss of market
value of the bonds if project Chariot is implemented?
Q3

Under the plan, HMC would retain most of MC’s longterm debt of $3 billion. MC has many levels of debt :
secured notes, unsecured debt, capital lease obligations etc.

Although MC execs stated that HMC would be able to meet interest payments, the spinoff of MII would
affect the security of MC debt holders as debt rating would be most likely lowered to below investment
grade.

Institutional investors such as banks, insurance companies, pension funds would have to sell their bonds
because of the law restricting them from holding any assets below investment grade. Furthermore, the
US. courts stated that corporations have no responsibilities to safeguard the interest of bondholders other
than those spelled out by the terms of the bond indenture.

In the case of MC, the bonds lacked an "event risk" covenant that would have blocked restructuring
(page 6, “legal considerations”). When analyzing the restructuring plan, it becomes obvious that the
restructuring comes at the expense of bondholders. The assets that generate the cash to service the
interest payments on the debt have been, for the most part, moved into MII. The perceived riskiness of
the bonds would therefore increase. This would lead to a lower rating from agencies.

A conservative estimate of the effect on price could assume a drop in price of 2% per rating level. In this
case, going from BBB to CCC, the bonds would go down three levels on the scale, and we can estimate
that bondholders would lose 6% on the value of their bonds. If the creditors planned to hold the bonds
until maturity, however, this would be irrelevant to them.
 Is project Chariot a matter of survival for Marriot in the fall of 1992?
The Excel work book allows you to estimate whether Marriot will be able
to service its debt, given your assumptions about future profitability,
revenue growth, and property sales. Please see case Exhibit 6 for
summary statistics on Marriott’s past performance.
Q4
•
HMC is the smaller company on paper, however also more effective one in regard to
sales and profit per FTE.
•
The question is, whether HMC is able to cover all of MC’s longterm debt of nearly $3 billion
as this is part of the spinoff contract. Although, it would have access through December
1997 to a revolving line of credit of $600 million from MII, if we aren’t able to attract
enough investors to increase working capital and elevate growth and profits to repay the
outstanding debt.
•
The interest of the Marriott brothers is to improve the financial situation of MII and HMC to
secure growth for both companies in the future. Since both of them are in the board of
directors and can influence the decisions of each company, they can create synergy
effects if they cooperate. Both companies can also help each other when it comes to
cost of capital. They can give each other loans at lower interest rates for example.
Q5
 Would you recommend the implementation of project Chariot?
The Marriott Corporation (MC) had been struggling with debt and cash flows due to the RealEstate slowdown that started in late
1990’s. Bollenbach recommended Project Chariot, the initiative that he believed could bring the company back to its previous
growth rate and help MC with the billion dollars stuck in debt. If I was a board member, I would make a decision after weighing the
pros and cons of the Project.
Pros:
 The split enables each management to focus on its core operations: HMC on real estate and MII on services and operations.
 Both companies would be able to generate additional equity funds by functioning independently.
 With MII setup as a debtfree entity, we can expect its corporate valuation and credit rating to grow substantially. This will prove to
be good for the shareholders who can expect a respective increase in their investments.
 The decision also allows for better management within the corporation as the two bodies would not have any internal
competition for allocation of funds.
 The transaction also allows MII to focus on expanding its management businesses as those individual opportunities require
relatively small amounts of capital."
Cons:
 Bondholders will be the worst affected if HMC is given all the debt.
 Splitting such a large corporation into two smaller entities will make it difficult for both companies to look for institutional investors
and would ultimately make financing more expensive than before.
 The credit rating of HMC will be downgraded.
If we look at the valuation of the companies, we see that the valuation of MC group in 1991 was around $3.65 Billion, while it was
about $3.8 Billion for HMC and MII combined. As we see its a small increase from the original valuation. Therefore, the MC’s board
member should not be too worried about the problems that result from the separation. Project Chariot solves more problems than it
creates. All problems created are relatively short term and can be worked on once MII becomes debt free and independant. The
bondholder’s will not be happy with the decision but once the real estate market comes out of the slowdown, HMC will be able to
start paying back its debt. Therefore, if I were a board member at MC, I would prioritize the longterm health of the company and
give my full support to Project Chariot.