EPGP-11 Sec B - LCA - Marriott - EPGP-11-153

INDIAN INSTITUTE OF
MANAGEMENT KOZHIKODE
Leadership and Corporate

Accountability
Submitted by
EPGP-11-153 | Chaitanya Ravankar

Why is Marriott management proposing project Chariot?
What is it trying to accomplish?
• The main objective of project Chariot is to help Marriott Corporation (MC) overcome present difficulty and lead to sustainable
development.
• Given the situation, raising funds in the capital markets would be severely limited due to massive burden of debt, no buyers for newly
developed properties, or buyers with no price upside.
• Project Chariot will facilitate MC to convert into 2 separate companies, one specializing in services and one specializing in real estate
holdings. This would benefit everyone involved, and this is also the accomplishment that Marriott management has tried to pursue.
• For investors, this step would bring opportunities to participate in “pure plays”, either management business or real estate
investment. In addition, investors would benefit from potential increase of stock value as the stocks were undervalued before project
Chariot.
• This was due to the difficulty in distinguishing and separately valuing ownership and management. After all, this would promote the
reputation of MC in the eyes of investors, leading to more easily raising funds in the capital market.
• For management, two companies mean that there would be twice as many top-level positions. This would be one way to keep talent,
especially ambitious managers to stay poised for rapid growth.
• For MC itself, HMC would be valued more based on its property holdings, so it would be under less pressure from investors to sell off
hotels at the distress prices; and would help to raise additional capital to finance growth.
What is the likely impact of project Chariot on the wealth
position of the shareholders?
• Shareholder now have majority stake in a corporation with a lower

probability of default while all the risk is transferred to debt holders. So
all the risky investments are highly leveraged with bond holders
exposed to the risk.
• As per Exhibit 1, Marriott international (MI) backed mainly by
shareholders equity of $0.8Bn and performing assets of $2.6Bn and thus
having less long-term debt ($0.4Bn), would be able to issue new debt
increasing value for both shareholders and the corporation.
• Thus, the shareholders would gain at the expense of bond holders and
the equity value of the company would increase. As a proof, the case
presents the debt-to-equity ratio to be 0.33 for MI.
Should Management be concerned by the loss of market
value of the bonds if project Chariot is implemented?
• MC’s debt indentures contained the usual provisions but lacked so called” event risk” to protect
bondholders from its potentially adverse effects. If event-risk covenants protected bondholder, they
often did so at the cost of lower interest rates.
• Also the separation of the two companies, HMC and MI, would affect the security of MC debt holders.
Bond rating agencies were likely to lower the rating on MC’s long-term bonds to a level below
investment grade. And it would force institutional holders of MC debt to sell their holdings because of
the loss of the market value.
• In my opinion, management should be concerned by the loss of the market value of the bonds,
corporations have no responsibilities to safeguard the interests of bondholders other than those
spelled out by the term of the bond indenture.
• Arrangement among a corporation, the underwriters of its debt, trustees under its indentures, and
sometime ultimate investors, are typically thoroughly negotiated and massively documented. The
rights and obligations of the various parties are spelled out in that documentation.
Is project Chariot a matter of survival
for Marriot in the fall of 1992?
• Assumptions
Annual growth of sales through existing units: To forecast annual growth
of sales, refer Exhibit 3 of the case, Sales section.
We see that sales are divided into the lodging and the contract services
segment, where the lodging is again divided into 3 lines: rooms, food and
beverages and other for the years 1989, 1990, 1991.
Thus growth sales for each of the segments and business line can be
calculated and then, after computing the average of the two, future sales
can be forecasted.
•
• Net income in 1992: September 1992 data from case, we have the estimated earnings per share (EPS)
and P/E ratios. Assuming Marriott Corporation in October 1992 does not announce Project Chariot,
there will not be a big change in the stock price by the end of the fiscal year (December 1992), which
implies that we can use the September stock price P=$16.
• Net Income =
• EPS = &
• Dividends: The company will pay steady dividends as in the period 1989-1991 ($27 million every year)
in order to compensate shareholders for supporting the company.
• Assuming the company manages to repay $650 million of debt as expected in September 1992 (see
exhibit 2 of the case), the interest-bearing debt of the company in 1992 will be;
Interest = Interest (1991) – MV Debt (1992) – E (Debt repaid 1992)
• Therefore if these assumptions hold, in 1992 MC has to sell $240 million
of assets held for sale (which is ~16% of total assets held for sale) and
then in the subsequent years, the minimum amount of assets it has to
sell in order to break even is 13% in 1993 and zero in 1994 and 1995.
• This means that they will be able to generate extra cash without having
to sell assets. In this way we see that the company by repaying off its
debt as expected in September 1992 and then reducing selling assets
still manages to reduce debt as % of capital from 82% to 74%.
• This will result debt to capital ratio to be better reduced if the company
sells more assets than the minimum required to break even at year-end.
Would you recommend the
implementation of project Chariot?
I would recommend project Chariot because it can solve the present problem and have some
benefits for MC. The idea 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 will benefit from the emerging profitable operations of Marriott
International (MI) .
• Both companies shall generate additional equity funds.
• Corporate valuation will improve by providing strong incentives to employees who work in
MI. E.g. publicly traded stock options are available for employees of MI, which should
provide motivation and reward.
• The division enables management of HMC focus on core operations.
• Shareholders are better informed due to separate financial statements.
• Internal competition for corporate funds is reduced.

EPGP-11 Sec B - LCA - Marriott - EPGP-11-153

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What is Marriott management trying to accomplish with Project Chariot?

What is the likely impact of Project Chariot on the wealth position of shareholders?

INDIAN INSTITUTE OF

Leadership and Corporate

EPGP-11-153 | Chaitanya Ravankar

• Shareholder now have majority stake in a corporation with a lower

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