Marriot Corporation

Case Marriot Corporation

The Key Question: Dose the Project Chariot a good project for Marriott Corporation?

Suggestion: Yes, the idea of dividing MC into two companies that separate out property ownerships from Company’s Services Operation is cost effective and value added (exhibit 1), thus should be recommended to the board of MC. As, the plan is launched by distributing same shares of special stock dividends to MC’s original shareholders, MC’s shareholders would be tax-exempted for these special dividends that they received as the same time company has benefiting from lower WACC and higher dividend payout (Exhibit 1). Additionally, the split strategy increases MC’s opportunity to raise funds at the lower cost in the capital markets through Marriott International Inc. By splitting out MII, MC is expecting to see that MII with a higher time interest earned of 10.4 and better financial structure (higher current ratio and lower debt to equity ratio) would be rated as “high quality” by S&P and Moody’s in the market (e.g. Aa for Moody’s and AA for S&P). As a result, MII could raise capital/fund easier and at lower rate than MC (assume the revolving loan in exhibit 1 can lower by 1%). This rating improvement would also resolve MC’s current constraint and limitation on raising funds in the capital market.

According to the plan, the new raised fund would be used to expand company’s hotel business by purchasing assets of competitors in financial difficulty. However, we don’t think this business plan with expansion would be accepted by the most of creditors without a proper message to the capital market. Because most of original creditors of MC’s bonds were institutional holders who had been suffered from collapse of Junk Bond and Real Estate Market and might also be forced to sell their holdings on MC’s bond at an extreme low price at the time when MC’s plan is implemented (MC’s bond would be downgraded to non-investment grade due to worsen financial structure). Therefore, most of institutional creditors in the market would have no intension to lend money to MII due to bad reputation resulting from the plan. Also, without “event covenant” in MC’s Bond indentures, other bondholders are worried that this new plan would also result in large losses for them in form of reducing in bond market price. Therefore, we believe that although MC is not restricted to the “event covenant”, it must convince institutional creditors and other bondholders that the creation of new entity “MII” is not a simple wealth transferring process, but an value-adding financial strategy on separating property ownership from Service management.

We recommend MC to follow below four strategies to gain investors and creditors’ trusts. First-able, to hold an investor/creditor meeting to go through their plan with a sophisticated and throughout presentation which consists a 5-year forecast on MII and HMC’s business growth, cash flow and repayment schedule. Second-able, MC managements could provide written personal along with the MII’s corporate guarantees to support the original MC’s Bond/Debt as well as the MII’s new raised debts. Third, the top management team may consider not hiring too many top executives for MII. Since most of the top executives in MC are all well-experienced in real estate and hotel industry. Thus, the board members in both companies could be the same to save company’s cost. Fourth, MC’s top managements should also propose a well-designed cash dividend plan of MII which could use to as cash injection to HMC on supporting HMC’s business.

For example, MII might consider incorporating a well-planned cash dividend policy to their major shareholders and top managers who promise to reinvest their money in HMC while the real estate market is recovering (Exhibit 2). As HMC would be valued more when its property holdings are appreciation, thus major shareholder and top managements’ promise to HMC’s