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

THE BALTIMORE SUN

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."

VTC Still, PPM America and some other bondholders fear that their investments will be in danger because Host Marriott, which has less profit potential, is saddled with most of the corporate debt. They say they bought bonds in part because the hotel servicing business could offset any problems of company-owned hotels.

PPM America, which is still battling the plan in pretrial proceedings, claims that Host Marriott will lose money for several years.

Marriott admits that, but adds that the $44 million Host Marriott would have lost last year includes an accounting charge of $220 million. The cash flow from Host Marriott operations will be about $340 million next year, Marriott says, more than enough to pay about $200 million in debt service.

Mr. Whiting, a managing director at Whitman, Heffernan, Rhein & Co. Inc., insists that Host Marriott must boost spending to keep up aging hotels. He says that will eat up much of the slim cash margin, even though Marriott's capital investment in existing hotels was only $35 million last year.

"The day of reckoning is coming," he said.

But other bond experts are satisfied with the plan as revised in March. Revisions, which led to a settlement between Marriott and some disgruntled bondholders, involved shifting some debt to Marriott International, giving Host Marriott a larger credit line and waiving some of Host Marriott's fees.

Standard & Poor's is fairly positive: A July 5 report called bonds of Host Marriott's hotel unit "stable" and gave them a BB- rating, below investment grade but strong for a bond deemed speculative. Bear Stearns & Co. calls those bonds "attractive" compared to other junk bonds.

And the early losses in Marriott bonds, some of which fell 30 percent when the plan came out, have been almost completely recouped. PPM America's bonds are now worth more than it paid, though Mr. Whiting says falling interest rates deserve most of the credit.

PPM America's bondholder group is still trying to convince a federal judge to block the deal. To do that, it would have to prove Marriott had planned the restructuring before selling bonds. Marriott denies it.

And Mr. Bollenbach says this deal is nothing like his Trump restructuring, where he persuaded lenders to let the developer out of $675 million in personal guarantees and to accept ownership stakes in shaky projects in lieu of repayment.

The difference: "These guys will get their money back."

THE NEW MARRIOTT

Friday, stockholders are expected to endorse a plan to split Marriott Corp. into two parts:

Marriott International

Main businesses: Hotel, food service and facilities management services

Est. 1992 revenues: $7.8 billion

CEO: J.W. Marriott Jr., now Marriott chairman

Host Marriott

Main businesses:

About 135 company-owned hotels, airport and highway concessions

Est. 1992 revenues: $1.2 billion

CEO: Stephen F. Bollenbach, now Marriott chief financial officer

The plan was altered after bondholders protested that debt would be dumped on Host Marriott while most profit potential would go to Marriott International. The significant changes:

Shifting debt. Land leased to outside hotel owners will go to Marriott International, along with $264 million of related debt. Marriott International also will receive two senior living communities that had been slated to go to Host Marriott, and $138 million of related debt.

Access to credit. Marriott International will boost its credit line to Host Marriott from $600 million to $630 million, and will extend repayment terms. It also will fund a $125 million mortgage for Host Marriott's hotel near Philadelphia's new convention center.

Management fees. Marriott International will waive some fees for managing Host Marriott's Courtyard, Residence Inn and Fairfield Inn hotels.

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