Marriott Corporation and Project Chariot
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Marriott Corporation and Project Chariot
The Marriott Corporation (MC), had seen a long, successful reign in the hospitality industry until the late 1980s. An economic downturn and the 1990 real estate crash resulted in MC owning newly developed hotel properties with no potential buyers in sight and a mound of debt. During the late 1980s, MC had promised in their annual reports to sell off some of their hotel properties and reduce their burden of debt. However, the company made little progress toward fulfilling that promise. During 1992, MC realized that financial results were only slightly up from the previous year and their ability to raise funds in the capital market was severely limited. MC was left with little choice, as they had to consider some major changes within the company if they wished to remain a successful business. Thus, J.W. Marriott, Jr., Chairman of the board and president of MC, turned to Stephen Bollenbach, the new chief financial officer, for ideas and guidance.
Bollenbach, who had a reputation for creating innovative financial structures in the hotel industry, proposed a radical restructuring for MC. Bollenbachs proposal included breaking MC into two separate entities. The new company would retain the service businesses of MC and have the financial strength to raise capital and take advantage of various investment opportunities. On the other hand, the old company would retain the hotel properties and the pressure to sell properties at reduced prices would be greatly lessened. This drastic restructuring proposal, deemed Project Chariot, had to be evaluated by J.W. Marriott before he went before his board of directors with his ultimate recommendation. Thus, Marriott planned to review the companys past financial history that led to their current position; evaluate Project Chariots advantages, disadvantages and value; determine the bond risk involved if Project Chariot was accepted and finally consider alternative recommendations.
Past History of MC
By the 1980s, the Marriot Corporation, founded in 1927, had grown into a financially sound, industry-leading corporation. Although MC went public in 1953 and continued to sell stock to the public, the Marriott family still retained the controlling interest of 25% of the company in 1992. Once J.W Marriott Sr. resigned in 1964, his son, J.W. Marriott Jr., took over the position and changed his fathers conservative financial procedures. Under Marriott Jr., MC began to borrow money to finance expansion in order to maintain the companys historical 20% annual revenue growth rate. The corporations past success had been achieved through the building of hotel properties for sale to investors, while at the same time maintaining long-term lucrative service contracts that would bring cash flow to the corporation.
MC went into joint ventures by constructing hotels and selling them to the Equitable Life Insurance Society, which became a very profitable and powerful growth strategy. Over one five year period, MC sustained an annual growth rate of 30% and had 70% of their hotel rooms owned by outside investors. The growth was so substantial that the corporation gained an exceptional reputation in the field for quality and reliability in service, which lead to hotel occupancy rates between 4 and 6% above the industry average. Marriott continued to widen the gap and in 1992, although the industry standard was 65%, Marriot Corporation was achieving 76 to 80%.
The Economic Recovery Tax Act, introduced in 1981, continued to stimulate MCs hotel-developing activities, as the new law created more incentive for ownership of real estate. MCs first real estate limited partnership gave investors $9 in tax writeoffs for every $1 invested. The company continued expansion, entering the market of mid-scale properties and introducing Courtyard in 1985 and Fairfield in 1987.
In 1986, the Economic recovery tax act ended the majority of tax incentives. When the real estate market collapsed, MCs income saw a drastic downturn and its year-end stock price fell by more than two-thirds, causing a drop over of $2 billion in market capitalization. As a result, the investor-owned MC went bankrupt for the first time, leaving the corporation with huge interest payments. Thus, MC was not only facing serious financial constraints, but was also unable to raise additional funds in the market to help recover the corporations financial stability.
Project Chariot
Stephen Bollenbech, chief financial officer (CFO) of MC, had an idea that in theory would help MC out of their financial distress. Bollenbechs idea, Project Chariot, was to conduct a major restructuring of MC. Under Project Chariot, MC would split into two companies, creating a special stock dividend for existing MC shareholders. This dividend would give stockholders of MC a share of stock in the new company, matching each share currently held in MC. The new company would be called Marriot International, Inc. (MII) and the existing company would be called Host Marriott Corporation (HMC). Under the division, based upon a projected pro forma basis, MII would have $7.9 billion in sales and operating cash flow before corporate expenses, interest and taxes and $408 million in taxes. HMC, again based upon a projected pro forma basis, would have $1.8 billion in sales, including corporate expenses, interest and taxes and taxes of $363 million. Under Project Chariot, HMC would retain all of Marriot Corporations long-term debt, which is nearly $3 billion. In addition, HMC would have access to MIIs revolving credit line of $600 million through December 1997. MII would have very little long-term debt, which would give the company the ability to raise additional capital to help finance growth.
Evaluating Project Chariot
There are a several items MC must consider prior to making the ultimate decision of whether or not to accept Project Chariot. The first of which is the potential advantages and disadvantages of the company undergoing a spinoff. While the concept of getting smaller or breaking-up might seem counterintuitive for MC, the action has the potential to benefit the company and its shareholders. The idea of Project Chariot is to split the parent company, MC into two entities, HMC (existing company) and MII. The potential benefits of the de-merger are the following: (
Equity holders benefit from the emerging profitable operations of Marriott (MII)
Both companies are able to generate additional equity funds
Corporate valuation is improved