Hyatt's IPO: Bad Timing or Family Necessity?

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The Grand Hyatt Tokyo

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Hyatt is among those who have taken a hit in 2009. In the first six months, the hotel powerhouse posted a 19% revenue decrease, a loss of $36 million and a revpar decline of 24%.

A family feud, rather than market conditions, appears to be driving the IPO.

Hyatt has long been rumored to be contemplating an IPO. The rumor mill started churning in 2002 when a bitter feud erupted between members of the Pritzker family (which owns Hyatt) over inheritance issues. The squabble began when two of the younger heirs, Liesel Pritzker and her brother Matthew, sued their father and 10 older cousins, claiming they had misappropriated about $1 billion from each of their trust funds. A nasty court battle ensued, in which an intricate web of offshore trusts was unveiled that grabbed the attention of the IRS. When the smoke cleared, the clan had agreed to divvy up the family's $15 billion fortune to family members by 2011. The payout plan would involve selling or floating many of the family's businesses.

The Pritzker dynasty owns a variety of businesses, ranging from a cruise line to a credit-checking company, but Hyatt is seen as the crown jewel. Industry experts speculate that it's this family squabble that is forcing Hyatt's IPO now.

The family has already been selling off stakes in some of its other businesses. It divested its Conwood tobacco company for $3.5 billion, sold a 60% stake in its Marmon Group industrial conglomerate to Warren Buffett's Berkshire Hathaway for $4.5 billion and even sold a 13.6% stake in Hyatt to Goldman Sachs and Madrone Capital Partners for $1 billion.

Had Hyatt acted faster and gone pubic in 2007 or even mid-2008, before the bubble burst, valuations would likely be much higher, says Butler. "The hotel world fell off a cliff on Labor Day 2008 — the world truly changed in terms of values, liquidity, banking — all of the factors that are critical to valuation," he says.

Although lodging stocks have outperformed the broader market in recent months amid signs the recession may be ending, a full rebound is likely years away, experts say.

Also, the company indicated in its IPO filing that the Pritzker family plans to retain control of the company through the issuance of two classes of shares, where family members will hold special Class B shares that entitle them to have 10 times the number of votes than those allowed by common shares. Indeed, the filing warns investors that "the concentrated control will limit your ability to influence corporate matters, and the interests of the Pritzker family business interests may not coincide with our interests or your interests."

The two-tier share system could also prevent the stock from trading at a full premium. "Two classes of stock with two different voting powers is generally viewed negatively by institutional investors," says John Arabia, a managing director at Green Street Advisors of Newport Beach, Calif. "You could get into a situation where somebody owns more of the company but has less control."

"It would certainly discourage me," says Ted Mandigo, director of TR Mandigo & Co., a hospitality consulting firm. "In the long term, I think it may trade at a discount to its peers because of the lack of control," he says.

Still, the offering could be a potential windfall for long-term investors looking to get into a stellar name on the cheap. Hyatt's highly regarded brand, solid balance sheet and savvy management team make it an attractive long-term play, industry experts say. It all comes down to price, says Arabia. "We're anticipating from 2010 through 2015 to see very significant growth in earnings [from major lodging companies]."

"It's better to get in slightly early, with the hypothesis that if you buy now at the bottom of the market, you'll really ride the recovery," says Bjorn Hanson, an associate professor of lodging at NYU.

Mandigo says there are merchant bankers, insurance companies and pension funds looking for places to park their cash that might view Hyatt as a smart investment. "This is something that's fresh, has a strong name behind it, and a good reputation in the industry," he says. "It's kind of like an oasis in the desert in terms of investment opportunity."

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