Though Hotels Are Slumping, Hyatt Preps for IPO

It has been a stock offering investment bankers have been drooling over for decades. Hyatt Hotels has a prominent brand name and a multibillion-dollar market value. On Aug. 5 the privately held company filed with federal regulators to begin the process of selling shares to the public.

Yet the question on many hotel industry insiders' minds is: Why now, when the travel industry is in the middle of one of its worst slumps in decades? At a recent meeting of executives in Chicago, Hyatt Chairman Thomas J. Pritzker publicly bemoaned the sorry state of the travel industry, noting that even well-to-do travelers are trading down to lower-priced hotels. "Lodging share prices today are generally no more than half of their peak levels from 2006-2007," says Michael Paladino, a hotel industry analyst at Fitch Ratings. The answer lies with Chicago's Pritzker family, which controls 85% of the company through family trusts.

The Pritzker dynasty can be traced to Nicholas J. Pritzker, an immigrant from Ukraine who founded a law firm in Chicago at the turn of the century. His grandsons, Jay, Robert, and Donald, greatly expanded the fortune. Jay Pritzker acquired the Hyatt House motel near Los Angeles International Airport in 1957 and built it into the lodging industry giant it is today.

Hyatt is a formidable company. Last year the business earned $168 million on sales of $3.8 billion. It produced cash flow of $687 million. Today, 413 hotels around the world fly the Hyatt flag. The company owns about a quarter of those outright, including such landmark properties as the Park Hyatt in Chicago, the Grand Hyatt in New York, and the 1,200-room Hyatt Regency in Atlanta.

Bickering HeirsThe family has squabbled, however, with the arrival of a fourth generation of heirs. In 2002, two of the younger heirs sued older family members for a larger share of the family fortune. That suit was settled in 2005. The feud led to a plan to split up the estimated $15 billion empire into 13 pieces, one for each cousin or sibling in the current generation. Pritzker watchers have speculated that taking the hotel chain public will allow family members to liquidate their various stakes if they choose. The family has since taken steps to create more liquidity in the holdings. In December 2007 the Pritzkers sold a 60% interest in their privately held industrial conglomerate, Marmon Group, which does not include Hyatt, to Warren Buffett's Berkshire Hathaway (BRKB) for $4.5 billion.

Four months earlier the Pritzkers sold a 13.6% stake in Hyatt to Goldman Sachs Group (GS) and Madrone Capital Partners, an investment firm founded by Wal-Mart Stores (WMT) heir Robert Walton, for $1 billion. That valued the business at $7.3 billion at the time. Around the same time, Hilton Hotels was purchased by Blackstone Group (BX) for $26 billion. Four Seasons Hotels was taken private for $3.8 billion.

The segment of the market in which Hyatt competes—luxury hotels aimed at business travelers—is the one hit hardest by the Great Recession. In the first six months of 2009, Hyatt's average occupancy rate hovered at 56%, down from 66% a year ago. Its average room revenues of $116 per night have fallen 31%. Industrywide, room revenues fell just 13%, according to Smith Travel Research. In the first six months of 2009, Hyatt's overall revenues fell by 18% and its cash flow by 50%. The company reported a loss of $36 million in the first six months of this year after earning $173 million in the same period of 2008.

Despite those poor numbers, Hyatt doesn't need the money. It has $968 million in cash on its books, vs. just $595 million in long-term debt, according to the Securities & Exchange Commission filing. A likely explanation for the offering now is that Hyatt Chief Executive Mark S. Hoplamazian, 45, wasn't ready two years ago, in the family's eyes, to lead a publicly traded company. He had assumed the CEO spot in December 2006 from Thomas Pritzker, whose first cousin Penny also sits on the Hyatt board.

The Pritzkers are taking steps to retain control of the company. They will continue to own Class B shares of Hyatt, which have 10 votes for every 1 of the common stock. The Pritzkers may be betting that the stock market, already on a roll, may be even more hospitable two months from now when the company and its underwriters overcome all the hurdles necessary for the public stock sale. Good market or bad, Hyatt will be welcomed by Wall Street. "I think it will be a success," says Lewis Wolff, chairman of Sunstone Hotel Investors (SHO), a Hyatt hotel owner.

With Joseph Weber in Chicago

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