Marriott shareholders OK splitting company in two Bondholders group lawsuit continues


WASHINGTON -- Shareholders of Marriott Corp. yesterday resoundingly approved the company's plan to split the Bethesda-based food service and lodging giant into two separate companies, voting 85 percent of the shares in favor of a plan that has been bitterly fought by dissident bondholders.

"It's a big event in our lives, in the history of our company," Marriott chairman J. W. Marriott Jr. said, speaking after the packed shareholders' meeting at the JW Marriott Hotel here.

Yesterday's vote, and an announcement that the company had settled a suit by preferred stockholders, brought Marriott near the end of months of bad publicity and fierce litigation that erupted after the plan was announced last October.

Bondholders have sued because they said their IOUs would be held by a company strapped with billions in debt, while preferred shareholders said the proposal unfairly deprived them of their dividends.

Officials hope to complete the split, which will divide Marriott into profitable hotel management company and a heavily indebted real estate management firm, by September.

Marriott International Inc. will manage 736 Marriott and Marriott-related hotels and unrelated food service businesses, while Host Marriott Corp. will own 139 hotels that Marriott built but was unable to sell because of the recession in real estate, plus highway rest stop and airport restaurant concessions.

Under the terms of the split, shareholders will get a share of each company for each share of Marriott they now own. Officials expect the price of Marriott International stock to take off quickly, while Host Marriott may take several years to shake off the aftereffects of the real estate downturn.

The only significant barrier remaining before the split can become effective is approval from the Internal Revenue Service, which the company expects to receive within two to three weeks.

The company later said its board of directors has set a record date of Sept. 1 and a distribution date of Sept. 10. J. W. Marriott will head Marriott International while his younger brother Richard will become chairman of Host Marriott.

The plan was designed to fix the problems Marriott ran into after the crash of the commercial real estate market left the company unable to sell hotels it had built.

Instead of having a lucrative and almost risk-free management contract on the hotels, Marriott was stuck with billions in debt and had to take on the risk of running the hotels as well.

Both the risk and the debt held down Marriott's stock price between 1987 and when the split was proposed, as Marriott badly under-performed both the stock market and shares of other hotel companies. Since October, Marriott stock has risen 60 percent as investors anticipate post-split growth in the management business slated to go to Marriott International.

Shareholders made clear that they were going to approve the deal and leave the bondholders to look out for themselves.

"Bondholders are speculators," said Evelyn Y. Davis, a shareholder gadfly who owns 200 Marriott shares. "If you want a safe thing, buy Treasuries [U.S. government bonds]."

Marriott chief financial officer Stephen F. Bollenbach has acknowledged that Marriott International stock may initially be worth six or seven times as much as Host Marriott shares.

He said the combined value of one share of each company right after the split has been estimated at about $30 a share. The company's stock closed yesterday at $27.875, up 12.5 cents.

The controversy has centered on whether Host Marriott will be able to repay the $2.1 billion in debt with which the split would leave it. Marriott projections show Host Marriott's cash flow will be about 70 percent more than its interest obligations, but the projections also indicate that Host Marriott will not be profitable immediately after the split.

PPM America Inc. of Chicago led a group of institutional shareholders that sued Marriott, alleging that it committed fraud when it sold bonds in April 1992. PPM America owns about $120 million of Marriott bonds.

Marriott denies any fraud.

"They sold us bonds in a hotel management company and left us with bonds in a depressed real estate company," PPM America attorney Steven Cooper said last week.

Standard & Poor's Corp. has given the Host Marriott bonds a BB-rating, a relatively high rating for what the agency considers a "speculative" bond below investment grade. The bonds fell as much as 30 percent in value in late 1992, but have since recovered most of their losses.

Several other bondholder suits have been settled as a group. In the proposed settlement, Marriott agreed to shift some debt to Marriott International, reducing the load on Host Marriott from nearly $3 billion to $2.1 billion.

U.S. District Judge Alexander Harvey II, sitting in Baltimore, is expected to rule on the settlement Aug. 6.

PPM America attorney Lawrence Kill told Bloomberg News Service the shareholder vote, which was expected, would not affect the suit.

But Marriott general counsel Sterling D. Colton said the suit is unlikely to stop the deal because PPM America has not asked for an injunction to keep Marriott from going ahead with the split.

"Their recovery will be whatever damages they may have incurred if we didn't make the proper disclosure," he said.




Oct. 5 -- Marriott proposes splitting into a profitable hotel management company, Marriott International, and a debt-laden

real estate company, Host Marriott.

Oct. 29 -- After Marriott's bond rating falls to junk bond levels, bondholders sue in Baltimore federal court.


Jan. 28 -- Marriott delays plan to continue talks with bondholders. Shareholders meeting delayed until June.

March 11 -- Marriott agrees to shift $450 million in debt to Marriott International and to issue $70 million in stock to retire some bonds.

April 2 -- Preferred shareholders sue to block the restructuring.

May 10 -- Marriott reaches a settlement with some bondholders.

July 1 -- A Delaware court refuses preferred shareholders' request to block the annual meeting.

July 23 -- Shareholders approve restructuring.

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