Hyatt IPO a family affair?

If it weren't for family politics, would the Pritzkers be taking Hyatt Hotels Corp. public?

Preliminary offering documents filed with the Securities and Exchange Commission suggest there is little other reason to sell shares in the Chicago family's crown jewel during the worst economy since the Great Depression.

The documents pull back the curtain for the first time on a global hotel behemoth with a sterling balance sheet and no apparent business need to raise cash right now.

From 2004 through 2008, Hyatt revenue grew from $2.7 billion to $3.8 billion. Cash flow almost doubled, to $687 million.

As of June 30, the company had $968 million in cash and $612 million in debt. Despite the credit crunch, it recently amended its credit agreement to provide an additional $1.5 billion in borrowing capacity.

Ordinarily, such a company would probably command a high premium in the public markets. But these are not ordinary times.

The collapsing economy has decimated the lodging business, and the documents show that Hyatt is no exception.

The company's operating results started to fall off a cliff last year, and for the first six months of 2009 revenue dropped 19%, to $1.6 billion, from the same period a year earlier. Cash flow was cut in half, falling from $417 million to $210 million, and on a net basis the company lost $36 million. Hyatt warned that a recovery in lodging would probably lag behind improvement in the broader economy.

Noting that asset values in the lodging industry have fallen 40% to 50% since their peak in 2007, John Arabia, a senior lodging analyst with Green Street Advisors in Newport Beach, said it was a difficult time for the industry.

Even if hotel occupancy rates stabilize soon, he said, big travel wholesalers are wielding unprecedented power to drive down room prices, a trend that may continue into 2010.

"Would valuations have been different if they had gone public at the industry's peak in 2007?" Arabia asks. "Clearly."

For the Pritzkers, however, many big decisions these days are driven by an agreement made after a family rift to divide their empire among 11 adult cousins by 2011.

In this case, the company will collect some proceeds from selling Hyatt shares. But the public offering's main purpose appears to be providing a cash-out opportunity for family members who hold 85% of Hyatt. Two other investors, Goldman Sachs Group Inc., which owns 7.5%, and Madrone Capital Partners, which owns 6.1%, will also have the chance to sell shares. Madrone is controlled by Rob Walton, Wal-Mart Stores Inc. chairman and an heir to the retail fortune.

The job of dividing the family assets falls to Thomas Pritzker, Hyatt's executive chairman and one of three trustees of the family's interests. Since 2007, he has generated at least $5.5 billion to distribute to family members by selling $1 billion in Hyatt securities to Goldman and Madrone and 60% of the family's Marmon Group industrial conglomerate to Warren Buffett's Berkshire Hathaway Inc. for $4.5 billion.

With the Hyatt offering, Pritzker will try to raise at least $1.15 billion for the company and selling shareholders immediately, while setting up a mechanism for family members to liquidate their remaining holdings if they choose without compromising the rest of the family's control over the public company.

The documents show that several provisions in the offering will enhance the Pritzkers' control. The public company will have two classes of stock: Class A, each share of which would have one vote, and Class B, which would have 10 votes. The number of shares in each class has yet to be determined. But the prospectus makes plain that the family will have clear voting control.

The family, Goldman and the Walton entity have also agreed to vote their shares as a block with the Hyatt board of directors when it comes to decisions such as asset sales or takeover offers. Moreover, although family members can sell stock over time, they can sell only 20% of their holdings each year through 2015 (unless the board decides otherwise).

Experts say this gradualism serves two functions: It prevents too many shares from flooding the market and diluting the value of each, and it helps the family retain ultimate control over Hyatt while any unwinding occurs.

As the prospectus warns potential investors: "This concentrated control will limit your ability to influence corporate matters, and the interests of [the] Pritzker family . . . may not coincide with our interests or your interests."

The family's decision to go public at a nadir for the hotel market may be Exhibit A supporting that statement. Even the prospectus points out that when the board's compensation committee set a price for equity grants under Hyatt's long-term incentive plan, shares priced at $29 each in September 2008 were priced at just $13 in June 2009.

A Hyatt spokeswoman said that because of SEC rules, the company couldn't comment during the registration period.


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