Late Friday night, after a really poor market day, Hyatt Hotels issued an amended S-1 for its planned initial public offering.  Because of last week’s market volatility, we are getting mixed signals about both the ultimate pricing and about which night the hotel operator will price its deal.  The deal is still set for 38 million shares in a price range expected as $23.00 and $26.00.  The company will also trade under the ticker “H” on the NYSE.

Hyatt is controlled by the Pritzker family.  It has a huge underwriting syndicate with Goldman Sachs as lead manager.  Co-managers are listed as Deutsche Bank, J.P. Morgan, Bank of America Merrill Lynch, Citigroup, UBS, HASBC, Piper Jaffray, Wells Fargo, and Scotia Capital.  Other companies also listed on the prospectus are Robert W. Baird, Loop Capital Markets, M.R. Beal, Ramirez & Co., Siebert Capital Markets, and The Williams Capital Group.  The underwriting group has an overallotment option to purchase up to an additional 5.7 million shares of common stock.

The mid-point of this IPO will generate roughly a $4.11 billion market cap, and the net tangible book value as of September 30, 2009 was approximately $4.5 billion (roughly $26.98 per share).  This is less than 80% of the value of Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) $5.4 billion market cap and less than half of Marriott International, Inc. (NYSE: MAR) $9 billion market cap.

The company has managed, franchised, and company-owned and developed Hyatt hotels, resorts and residential and vacation ownership properties around the world. At the September 30, 2009 date, tehg company’s global portfolio was made up of 415 Hyatt properties consisting of 119,857 rooms and units broken down as follows:

• 157 managed properties (60,836 rooms), all of which it operates under management agreements with third-party property owners;
• 104 franchised properties (15,906 rooms), all of which are owned by third parties that have franchise agreements with Hyatt and are operated by third parties;
• 96 owned properties (including 4 consolidated hospitality ventures) (25,783 rooms) and 6 leased properties (2,851 rooms), all of which the company manages;
• 27 managed properties owned or leased by unconsolidated hospitality ventures (12,226 rooms);
• 15 vacation ownership properties (933 units), all company managed;
• 10 residential properties (1,322 units), all managed by the company but some owned by the company.

For Fiscal December-2008, revenues were $3.8 billion, net income attributable to Hyatt Hotels Corporation was $168 million and adjusted EBITDA was $687 million. For the nine months ended September 30, 2009, revenues were $2.4 billion, net loss was -$31 million and adjusted EBITDA was $302 million.  The company also as of September 30 had total debt of $857 million and cash and cash equivalents of $1.3 billion along with an undrawn borrowing capacity of roughly $1.4 billion.

These shares being sold are Class A shares with one vote per share.  There will be an additional 130 million Class B shares have 10 votes per share.  Assuming there is no overallotment option, holders of Class A common stock will control approximately 2.8% of the total voting power and will own 22.6% of the total outstanding shares of common stock.

The only funds that will be going to the company will come from the overallotment, if exercised.  All other shares are being sold by the Pritzker family.  Besides the notion that hotels have struggled on lower traveling in 2009, the issue is that the funds will be going to the Pritzker rather than to the company.

Barron’s called the Hyatt Hotels IPO “The Motel 6 of IPOs?” this weekend.  But the poor title was actually a complement as it noted it was “asset-rich global hotel owner and operator has a great balance sheet and is likely to come to market at a discount to its tangible book value.” Barron’s also said that value investors should look at this IPO.  We share some of the publications optimism, but a larger picture needs to be reviewed.

Our own take is that we’d be happier if more funds were going directly into the company’s cash accounts while the economy recovers and while we are hopeful that 2010 will be better in the hospitality and hotel sector than what we saw in 2009.  We’d also feel better if this wasn’t so family-centric versus shareholder-centric in the ownership and voting circle.

Despite us pointing to this IPO being too similar to the past trend of private equity IPOs, there are some positives here.  First off is that the deal is coming below tangible book value.  The second is that we are more than comfortable with the leverage here compared to what we have seen elsewhere.  We are not going to issue any open buy recommendations ahead of any formal pricing, but patient investors and value investors are getting to invest at cheaper levels than many other IPOs and secondary offerings have shown.

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JON C. OGG
NOVEMBER 2, 2009

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