Marriott
S-F-249
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
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