Mariott Case

The purpose of this memo is present the analysis and answer the questions revolving around the Project Chariot, the Spin-off that allowed Marriott to separate its business activities in its world famous hotel management business and a separate real estate business in 1994. This project involves the splitting up the company into two separate entities, Marriott International Incorporated (MI) and Host Marriott Corporation (HM) in order to minimize the debt burden and improve the financial health of the company after severe effects from real estate market crash and the slowdown in the business in early nineties.

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.

1) The first analysis is the impact assessment for the parties and stakeholders of Marriott:

According to the reorganization plan MI would operate hotels and include Marriott's service businesses. It would also own Marriott's trademarks, trade names, reservation and franchise systems. HM would own Marriott's hotel properties and undeveloped real estate. It would also operate food, beverage, and merchandise concession in airports and toll-road rest areas.

Impact Assessment for:

a) Shareholders: the project would give each shareholder one share of the new Marriott International Inc. (MI) for each share of Marriott, so since no cash would be exchanged/transferred. It would have the beneficial effect of diversifying the risks into two categories: 1) services and 2) real estate. They can look at a develeraged and well capitalized business, which could deliver enhanced returns on the one side and HM being well covered by the value of the real assets in case of default. The trade looks favourable on paper and so should increase the interests of shareholders.

b) Bondholders: Bondholders are worse off. Distressed real estate assets together with a decreased ability of income generation are now backing HM bonds. This decreases the company's ability to repay the accumulated debt, which becomes fully dependent on the value of the real estate. Finally, the HM bondholders also lose the benefit of diversification of earnings generation from three different businesses.

The subordinated bondholders are also worse off because the company will take a line of credit from MI, which will be ranking pari passu with its senior obligation. This will make their debt repayment even riskier and therefore their bonds will decrease in value even further.

Finally, there is also a high risk for the current liabilities' holders as the company might not be able to generate sufficient operating income for its repayment and thus will depend on the credit line from MI for its current liabilities refinancing.

c) Management: