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Marriott Corporation

Submitted by: Group B


Business Model: Developing hotel properties and selling them to outside investors
while retaining long term management contracts.
Current Issues: Due to economic slowdown real estate market crashed which left
the company with lot of debt. It became difficult to raise capital in the capital
market.
Proposed Spinoff: MCs service business would be split off from its property
holdings. The new company Marriott International would have the financial strength
to raise capital and Host Marriott Corporation would carry most of debt in its books
of account and its concession in toll roads and airport. HMC would have access to a
revolving line of credit of $600 M from MII. The stockholders of MC would be given a
share of stock in new company to match each share they held in MC. MII would have
the right to lease and operate senior living facilities owned by HMC.
MII would have the right to purchase 20% of HMCs voting stock at market value in
the event of a change in control of HMC. MII would also have right of first refusal if
HMC offered its toll road and airport concession for sale. The combined after tax
earnings of two separate companies would be smaller than MC as a single entity.
The CFO was convinced that cash flow for HMC were more than sufficient to cover
for debt service.
Implication for Bondholders: The separation would affect the security of
bondholders. Moodys and S&P were likely to lower the ratings of MCs long term
loans to a level below investment grade. This can force some institutional investors
to sell the bonds.
The deal may face legal problems if the value of debt nosedived due to low ratings,
which as per the law when debtor
1. Received less than reasonably equivalent value for the property transferred
2. Became insolvent after the transfer, retained reasonable small capital, debts
beyond ability to pay

EBIT
INTEREST
NET INCOME
PRFD. DIVIDEND
NET INCOME, COMMON
EPS
TOTAL ASSET
DEBT
PRFD. STOCK
COMMON EQUITY

MII
HMC
million $ except EPS, times interest
259
123
25
210
134
-49
0
17
134
-66
1.4
-0.69
2600
4600
400
2600
0
200
800
600

TIMES INTEREST
DEBT % BOOK CAPITAL

10.4
33%

0.59
76%

Recommendations: After split off, the bond rating of HMC would downgrade to
speculative and there is a possibility that bondholders might file case against the
company. But the company can benefit from the fact that none of the long term
debt contained event risk covenant. Considering the recent rulings in favor of
companies who have gone for leveraged buyout option and also company does not
have any other ways to raise capital for now, we would suggest to go ahead with
the split.

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