This study source was downloaded by 100000830539532 from CourseHero com on 01 17 2022 11 31 35 GMT 06 00 https www coursehero com file 35224738 CORPO 3 Finaldocx University of Lausanne Jocelyn ChappuisCorporate Finance Yehouda Trabelsi April 2015 Jonathan LutzCorporate Finance Case study 3 Marriott CorporationJonathan Lutz N 11421047Yehouda Trabelsi N 11423514Jocelyn Chappuis N 10423432 This study source was downloaded by 100000830539532 from CourseHero com on 01 17 2022 11 31 35 GMT 06 00 https www coursehero com file 35224738 CORPO 3 Finaldocx University of Lausanne Jocelyn ChappuisEMF Finance Master Yehouda Trabelsi April 2015 Jonathan LutzQuestion 1 Project ChariotJ W Marriot founded Marriot Corporation in 1927 This company experienced an intensive growthduring the 1930s and the 1940s It was culminating during its IPO in 1953 where one third of thecompany s shares were sold to the public At the beginning Marriot s main business was to acquirerestaurants and cafeterias and manage them as well as supplying food to the airline industry In theyears following the IPO the company was able to further expand its business by opening its first hotelin 1956 and growing internationally in the hospitality industry The company had a virtue of aconservative strategy in terms of financial policy and an attentive care of the services quality anddetails In 1964 J W Marriott Sr resigned and his position was taken by his son whose financial approachdiverged greatly from his father s In fact the company began heavy borrowing from banks and otherfinancial institutions of both senior and unsecured debt this allowed MC to engage in a business wherethey were developing hotel properties around the world and selling them to outside investors retainingat the same time long term management contracts and outperforming its competitors in terms ofoccupancy rates At the beginning of the 1990s this boom ended First because of the diminishing of new limitedpartnership opportunities then with the collapse of the real estate market This resulted in an importantdrop in the company s income and in the stock price falling more than two thirds from its pre crisisvalue The company s financial condition impoverished in order to reduce the debt burden This forcedthe management to start selling properties at fire sale prices The CFO of Marriott proposed a solution to this situation Project Chariot The Project Chariot s corewas to split MC in two separate companies Firstly Marriott International Inc MII this retains MC s businesses of lodging food and facilitymanagement Secondly Host Marriott Corporation HMC this comprised MC s real estate and tollroads concessions The aim of the project was to separate the different businesses in order to alleviate the long term debtpressure brought by the real estate businesses on the other segments In fact HMC would retain most ofthe long term debt of MC roughly 3bn and MII would exploit a revolving line of credit of 600mn with access guaranteed to HMC through 1997 even though it would remain a under leveraged company Transferring long term debt from MC would help the company to improve its efficiency and its abilityto raise new capital allowing the company to save the more profitable line segment MII in case HMCwent bankrupt and to seek expansion opportunities Question 2 Impact of Project Chariot on the wealth position of shareholdersWhen considering the possible impact of Project Chariot on the wealth position of the shareholders there are several issues that should be addressed First of all given the troubled situation of thecompany it is likely that the announcement of the spinoff with the publication of the pro forma of theMII and HMC will have a positive impact on the MC s stock price which will immediately return again to its shareholders This study source was downloaded by 100000830539532 from CourseHero com on 01 17 2022 11 31 35 GMT 06 00 https www coursehero com file 35224738 CORPO 3 Finaldocx University of Lausanne Jocelyn ChappuisEMF Finance Master Yehouda Trabelsi April 2015 Jonathan LutzGiven the data in pro forma but lacking other information we tried to calculate the Enterprise Value forboth MII and HMC after they start trading and compared it to the one of the entire company before thespin off We used the well known definition of Enterprise value as a sum of the company s debt marketvalue and the equity market value and the number of outstanding shares for 1992 provided in theSpreadsheet To make the calculations we assumed a range of possible stock prices for the both MII andHMC once they started to trade publicly Concerning HMC given the really poor fundamentals a rangebetween 2 5 seems reasonable Regarding MII instead we believe a reasonable lower bound would bethe MC s price in 1992 16 and an upper bound can be derived by making use of the EPS of MII 1 4 to be compared to the same EPS value when the company was still profitable EPS 1 4 Share Price 30 1987 data however taking into account that the market needs some time to regain confidence inthe company because at the moment the restructured company starts trading it may be below 30 weassumed a maximum bound of 25 Given the stock dividend the number of shares in both MII and HMC will be the same Given also thatafter the spin off HMC debt will most likely be downgraded to find the market value of debt we simplycomputed what percentage of MC s debt is assigned to each company and multiplied by MC marketvalue of debt in case it is downgraded to B rating For MII we assumed the rating stays at BBB Theresults are presented belowAs shown the Enterprise Value of MII plus HMC is higher than MC alone benefiting shareholders Another issue to be addressed is the benefit in terms of diversification that would result for thecompany s shareholders given that any existing shareholder would receive a stock dividend matchingthe stock they hold in MC no cash is involved in the spin off bringing a gain for investors in terms ofrisk diversification In fact even if HMC would result in a highly leveraged company and it debtexpected to be downgraded from BBB to B high probability of default shareholders would still havepositive cash inflows from MII operations since the latter company could sustain high growth thanks tolow level of long term debt and good ability to raise capital Therefore even if HMC would go bankrupt investors would still keep the benefits from ownership of MII Finally it is worth noticing that the Marriott family