Bondholders play difficult hand in Marriott deal Vote on dividing company is Friday

July 18, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

For someone with such choice words for attorneys, Stephen F. Bollenbach deals a mean hand of Lawyer's Poker.

As shareholders of Bethesda-based Marriott Corp. prepare to vote Friday on the chief financial officer's plan to split the hotel giant into two companies, the deal stands as a harsh reminder of corporate pecking orders.

Stockholders come first. And they stand to make lots of money on the plan -- they already have, in fact, because Marriott stock has risen almost 60 percent since the split was proposed last October.

Bondholders come later. The plan has shocked some bondholders -- and triggered lawsuits -- because it would shift about $2.1 billion of Marriott's $3 billion in debt to Host Marriott Corp., a real estate-based operation that is the weaker of the two newly created companies.

Even whan Marriott tried to make the plan more attractive in March, it added tough terms to convince bondholders that they'd better fold. By agreeing to the deal, they could swap Marriott bonds for some stock and longer-term paper backed by a Host Marriott unit that holds hotels and is financially stronger than its corporate parent. If they balked, they'd have to depend on the corporate parent to repay them. It was a bluff many bondholders wouldn't call.

And those who are trying to call Marriott's bluff are bitter. "We bought bonds in a hotel service company, and they left us bonds in a depressed real estate company," said Steven Cooper, attorney for PPM America Inc. of Chicago. PPM America leads a group that owns about $400 million of bonds and is trying to block the deal in U.S. District Court in Baltimore.

"You've got a lot of very grubby, very motivated people saying things," snorts Mr. Bollenbach, who returned to Marriott as chief financial officer last year after a stint as finance chief to New York developer Donald Trump. "[Mr. Cooper] gets paid if he's successful. You have a lot of people who get paid for screwing up deals. That's what this is all about."

Still, bondholders are shut out in two ways. Stockholders, who own the company, get to vote on the restructuring plan; bondholders don't. And bondholders can't retaliate by refusing to lend Host Marriott money; the deal is structured so the company won't need to borrow.

That gives Mr. Bollenbach, who will be Host Marriott's chief executive, plenty of time to prove to Wall Street that he has been fair to bondholders. That's his ace in the hole.

If the plan works, that is.

The plan would split the company into Host Marriott and Marriott International. Holders of Marriott stock will get one share of each company after the deal is done, which could be as early as September.

Marriott International would retain management contracts on 736 Marriott hotels, deals to operate 2,910 cafeterias, and management contracts for resorts, golf courses and senior living communities.

That business carries little risk. The hotels are already built and popular, with an occupancy rate about 13 points above the industry average of 61 percent. And because Marriott International makes its money from management fees, it has no mortgage risk. Total revenue for 1992 was estimated at $7.8 million.

Host Marriott Corp. would get company-owned hotels, which make money but tie up capital and are riskier than management deals. It also would get highway and airport concessions, for estimated total revenue of $1.2 billion in 1992.

Company-owned hotels and related debt have been the big millstone for Marriott stock.

It was trading at about $30 in 1987, but had slipped to $16.50 at the end of 1991, two months before Mr. Bollenbach returned. By comparison, the Standard & Poor's 500 was at 194 percent of its 1987 level, and the hotel industry group was at 78 percent.

Mr. Bollenbach's revitalization plan gives stockholders a chance to make money now on Marriott International, while waiting out Host Marriott's real estate problems and hoping that stock will rise later.

So far, Wall Street has reacted favorably. Marriott stock closed at $27.25 Friday, and Alex. Brown Inc. analyst Steven Rockwell says the plan deserves most of the credit.

"It should increase the value of the company both short term and long term," he said. "It enables Marriott International to grow its room base much more rapidly than Marriott Corp. could."

Mr. Rockwell expects the two stocks to trade for a little more than $30 a share combined. One measure of how much the deal favors Marriott International: He expects Host Marriott stock to trade around $4.

Mr. Bollenbach doesn't quarrel. "I don't know if it will be $27 and $4 exactly, but it's a ratio like that."

And he might be expected to watch the stock closely -- last year he was granted options to buy 193,000 shares of Marriott Corp. stock, at prices ranging from $16.87 to $19.63.

"Clearly Steve is the architect of the plan, and it makes him a rich man," said Edward C. Whiting, a financial adviser to the PPM America group. "If it goes through, he's an instant multi-millionaire."

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