Oct. 28 (Bloomberg) -- Hyatt Hotels Corp.’s planned initial public offering has conflicts that allow the founding Pritzker family to benefit ahead of shareholders, research firm Green Street Advisors said in a report today.

“Simply put, Hyatt’s corporate governance is the worst in our entire coverage universe,” wrote analyst John Arabia at the Newport Beach, California-based firm. “The existing owners are sending a strong signal to outside public shareholders that the Pritzker family will firmly control Hyatt, even if the family’s economic ownership interest falls below 50 percent.”

Hyatt, which plans to raise as much as $1.14 billion in the share sale, set up two classes of shares that give the Pritzker family more voting power than other shareholders, according to regulatory filings. Penny Pritzker, the first cousin of Hyatt Executive Chairman Thomas J. Pritzker, will serve on the board of the company as an independent director.

“The use of super-voting common shares, which cement the Pritzkers control as long as their economic ownership interest remains above 15 percent, is particularly objectionable, although not the only governance issue that has a foul odor,” Arabia said. Penny Pritzker’s designation as independent is “misguided,” he said.

Hyatt, which runs 413 Hyatt-brand hotels with 119,500 rooms, is going public as the recession cuts hotel revenue and pushes some lodging owners to default on loans. Occupancy in the U.S. dropped to 57 percent this year through September, from 63 percent a year earlier, according to Smith Travel Research.

Voting Control

Hyatt said the Pritzker family will own about 80.7 percent of the company’s Class B common stock, representing about 62.4 percent of shares outstanding and 78.4 percent of total voting power. Each Class B share is entitled to 10 votes compared with one vote per Class A share, according to company filings.

“Such a dual-class structure is very, very infrequent,” Arabia said in a telephone interview earlier this week. “We live in a democratic society where one vote should give you one equal seat at the table. There could be a day where the Pritzkers own a minority of the shares but still have control.”

Green Street praised Hyatt for having a strong brand name and reputation in the lodging industry.

“There is much to like about the Hyatt story,” the report said. “The company has good brands and solid relationships with the hotel ownership community, and if it executes its strategy properly, is likely to generate outsized profit growth over the next decade. On the flip side, Hyatt’s shareholder-unfriendly corporate governance and the potential conflicts with the Pritzker family warrant a sizable pricing discount.”

Hyatt, founded more than a century ago by Penny Pritzker’s great-grandfather, said in an Oct. 15 filing that disagreements among family members could disrupt the chain’s business and hamper its stock price.

Green Street said the company’s shares should trade at a value that’s lower than the average of its peers in the industry.

Hyatt plans to sell shares at $23 to $26 each. Its peer group in the U.S. includes Marriott International Inc., the largest U.S. hotel chain, and Starwood Hotels & Resorts Worldwide Inc. Marriott climbed 28 percent this year and closed at $24.78 in New York Stock Exchange composite trading today. Starwood, the owner of luxury brands including St. Regis and W Hotels, has risen 65 percent this year to close at $29.50 today.

Farley Kern, a Hyatt spokeswoman, declined to comment on the Green Street report.

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

Last Updated: October 28, 2009 18:36 EDT