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: Management will be clearly benefiting from the spinoff transaction. They will be able to create a new company with much less debt, good earnings generation and focused to the hotel business which has been their main business over the years. At the same time, they are able to dispose all the accumulated debt from the past. Finally, with the new company they will have the ability to raise financing on better terms in order to finance future growth.
d) The value of the whole company: The value of the whole company: At first glance the value of the whole company will increase as MI is mainly unlevered while HM’s loans will be marked down significantly. However, the value of the whole company will depend on: (i) the ability of HM to generate future earnings, (ii) the value of HM assets relative to its debt (iii) the ability of MI to find and finance new projects on good terms and (iv) the ability of the management of both companies to implement the above.

2) In second instance assess whether the proposed restructuring is consistent with management’s responsibilities:
Under project chariot, MI and HMC would have different independent management teams. For MII, this means that the new spin-off would include little long term debt and thus better prospects for MI. given Bollenback experience in managing leveraged real assets, management responsibilities are in line with enhancing shareholders value. But some room for criticism still remains towards the treatment of bondholders, who may have been kept in the dark too long before the decision was officialised. In essence, Management isn’t responsible as they obey to the rule of doing their best to achieve balanced debt ratio and hold investment grades, and maximize value of the firm.

3) If project chariot were to be implemented what would be our position as board members?
Assuming that the spinoff is legal, the main considerations would be ethical and economical. From an economic standpoint the transaction makes sense for the shareholders as it makes them better off from the current situation, and simultaneously provides them with the ability to finance new projects on better terms, which will be managed from the same management team, as in the past, with a proven record. The market response is as follow:
Year Total Liabilities (L) Total Assets (A) Debt ratio = L / A
1987 $3 588 $4 579 78,36
1988 $4 560 $5 371 84,90
1989 $6 104 $6 732 90,67
1990 $6 519 $6 926 94,12
1991 $5 721 $6 400 89,39
1992 $5 625 $6 410 87,75

In the meantime, from 1987 to 1990, the ratio operating income to interest expense dropped from 2.75 down to 2. Also, from 1990 to 1992, the stock price went from $10.5 up to $17. So while debt ratios was going down the share price was increasing, improving the value of the firm.
Ethically, the transaction seems to be more difficult to evaluate. Although it protects the shareholders’ interests and improves their financial position, it reduces the value of the bondholders’ claims. This action will have a negative impact on the companies’ reputation and might also decrease the group’s ability to raise financing in the future.
Taking into account the above, We would advise for the Project Chariot, as We would need to protect the shareholders’ interests and make sure that the company would be able to generate value in the future. In terms of the bondholders’ claims, which have been decreasing in value for the past 3 years, this solution would provide them with a good chance to recoup their financing at par as MI would provide a credit line for HM implicitly providing a ‘’backstop’’ for the repayment of its debt. In return for this credit line, the bondholders would have to accept a current decrease in the value of their holdings.