Graduate School of Business STANFORD UNIVERSITY
MARRIOTT CORPORATION BONDHOLDERS VERSUS EQUITY HOLDERS
On October 5, 1992, Marriott Corporation announced a plan to restructure the company by splitting itself into two parts. The announcement caused immediate and opposite price movements for its stock and its bonds. Stockholders were happy and bondholders were in a furor, particularly those that bought a new issue of bonds in April. The Restructuring Plan The two separate companies were to be Marriott International and Host Marriott. The former company would manage/franchise over 700 hotels and motels. In addition it would manage food and facilities for several thousand businesses, schools, and health-care providers. Finally, it would manage 14 retirement homes under contract. For these businesses, 1991 sales amounted to $7.4 billion. J. Willard Marriott, Jr., Chairman of Marriott Corporation, was to become Chairman of Marriott International. Host Marriott was to own most of the hard assets. More specifically, it would own 139 hotels or motels, 14 retirement communities, and nearly 100 restaurants/shops at airports and along toll roads. For these businesses, 1991 sales were $1.7 billion. Operating cash flows for these businesses approximated 40 percent of total Marriott Corporation operating cash flows, pre-restructuring. Richard Marriott, Vice Chairman of Marriott Corporation, was to become Chairman of this company. The key element in the restructuring plan was that Host Marriott was to keep the debt associated with these assets, approximately $2.9 billion. In contrast, Marriott
International would have only modest debt after the restructuring. The bond indenture was felt not to preclude such a transfer of assets and debt. Known as event risk to bondholders, there were numerous cases of this in the 1980s with the leveraged buyout movement. Bondholder wealth was expropriated in favor of equityholders, and the Marriott restructuring was felt to be a variation off the same © 1992 by the Board of Trustees of the Leland Stanford Junior University. All Rights Reserved. This case was written by Professor James C. Van Home of Stanford University on the basis of publicly available data and information.
theme. While Marriott International was to provide a $630 million line of credit to Host Marriott, the expiration date of the line was sooner than the maturities of many of the bond issues outstanding. Merrill Lynch was advisor to Marriott on the restructuring plan, and Marriott’s new chief financial officer, Stephen Bollenbach, was instrumental in the development of the restructuring plan. It called for stockholders of Marriott Corporation receiving one share of stock in each of the new companies for each share of stock previously held. Technically, the transaction represents a spin-off. The Marriott family owned approximately 25 percent of the shares before, and would initially own the same percent in each of the two companies afterwards. The Company’s Debt Structure Year-end balance sheets for 1991 and 1990 are shown in Exhibit 1, and longterm debt at January 3, 1992 is seen to be $3.2 billion. This debt included some dozen bond issues with a total face value of $2-i /4 billion. Maturities ranged from one to 15 years, and all issues were rated BBB by Standard & Poor’s. This rating was later lowered to single B, which remained the bond rating for the new Host Marriott. In contrast, Marriott International received a rating of a single A, an increase over the rating for the pre-restructured company. The company’s legacy of debt came from aggressive expansion of hotels and motels in the i980s. With depressed real estate conditions in the early 1990s, the company was unable/unwilling to sell off certain assets and reduce its debt. The company’s strategy was to manage properties, not necessarily to own them. For the most part, ownership was viewed as only a temporary phenomenon during initial...
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