Piece was available to subscribers: 11-01-2009
H - Hyatt Hotels
H - Hyatt Hotels plans on offering 38 million shares at a range of $23-$26. Insiders are selling all shares in the deal. If over-allotments are exercised H will be selling 5.7 million shares and the total deal size will be 43.7 million shares. Goldman Sachs is lead managing the deal, nine firms are co-managing. If the over-allotment is exercised, H will utilize the ipo proceeds for working capital and other general corporate purposes. Post-ipo H will have 173.7 million shares outstanding for a market cap of $4.256 billion on a pricing of $24.5.
Thomas J. Pritzker, H's Executive Chairman, and his family will own 60% of H post ipo. Mr. Pritzker is the selling shareholder in this deal. **Note there will be separate share classes here to ensure the Pritzker family retains controlling voting interest in H even if their interests drop below 50%. Expect to see a secondary here sometime the first year. The Pritzker family has agreed not to sell more than 10 million shares the first year public and will still having voting control even if they own only 15% of outstanding shares. This ipo appears to me to be an exit strategy for the Pritzker family, while still retaining voting control over H. The structure of the voting shares is really unfair for non Pritzker Family shareholders. Expect a number of secondaries here over the next few years as the Pritzker family divests stock while still controlling H.
Goldman Sachs will own 7% of H post-ipo. Goldman invested their stake approximately two years ago, and on paper, have lost half that investment on an ipo pricing of $24.5.
History - Hyatt was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Over the following decade, Jay Pritzker and his brother Donald Pritzker, working together with other Pritzker family business interests, grew the company into a North American management and hotel ownership company, which became a public company in 1962. In 1968, Hyatt International was formed and subsequently became a separate public company. Hyatt Corporation and Hyatt International Corporation were taken private by the Pritzker family business interests in 1979 and 1982, respectively.
From the prospectus:
'We are a global hospitality company with widely recognized, industry leading brands and a tradition of innovation developed over our more than fifty-year history.'
Hyatt Hotels, pretty self explanatory we do not need a long definition of what H does. H's full service hotels operate under four brand names: Park Hyatt, Grand Hyatt, Hyatt Regency and Hyatt. H recently introduced a 5th brand, Andaz.
Grand Hyatt - Features large-scale, distinctive hotels in major gateway cities and resort destinations. Presence around the world and critical mass in Asia.
Hyatt Regency - Full range of services and facilities tailored to serve the needs of conventions, business travelers and resort vacationers. Properties range in size from 200 to over 2,000 rooms.
Hyatt - Smaller-sized properties located in secondary markets in the United States, ranging from 150 to 350 rooms.
As of 6/30/09 H's worldwide portfolio consisted of 413 Hyatt-branded properties (119,509 rooms and units) in 45 countries, including:
* 158 managed properties (60,934 rooms), all of which H operates under management agreements with third-party property owners;
* 100 franchised properties (15,322 rooms), all of which are owned by third parties that have franchise agreements with H and are operated by third parties;
* 96 owned properties(25,786 rooms) and 6 leased properties (2,851 rooms), all of which H manages;
A little surprised H owns outright only 96 of the 413 Hyatt branded properties. 38% of Hyatt properties are owned by third parties and managed by H.
Properties in which H manages for third party owners: H derives management fee revenues and a percentage of profits, usually under 20%
Franchised: H does not share in profits of these properties, instead collects franchise and royalty fees.
80% of revenues are derived from United States properties. 54 properties received the AAA four diamond lodging award in 2009. H operates in 20 of the 25 most populous urban centers around the globe.
In addition to four full service brands, H also operates Hyatt Summerfield Suites an extended stay brand.
Through first nine months of 2009, daily revenues per available room were $101, with international rooms having $116 per available daily room. **Note that this is a dip of approximately 20% from 2008. Reason for drop has been the worldwide economic slowdown. Should also note that for the quarter ending 9/30/09, both overall revenues per room and international revenues per room increased slightly from 2009 average.
Expansion - For a mature hotel chain, H actually has a solid balance sheet. Post-ipo H will have $1.34 billion in cash with $858 million in debt. Balance sheet wise H has plenty of flexibility to acquire and/or develop new properties. I would expect them to do so going forward. H can use cash, credit line, stock or a combination of all three to go after acquisitions or new property development once public. Expect H to be fairly aggressive in looking to acquire properties going forward, especially as a number of other brands currently have credit issues. H expects to focus expansion efforts on India, China, Russia and Brazil, where there is a large and growing middle class along with a meaningful number of local business travelers.
Cyclical - H has seen revenues decrease sharply each of the past two recessions('01-'02 & '09). H notes that their revenue per available room decreased more sharply during this recent slowdown than in 2001 and 1991.
Debt defaults - H not only manages Hyatt properties owned by third parties, they also have financed a number of third party Hyatt facilities. For example in 2008 H made a $278 million loan to an entity in order to finance its purchase of the Hyatt Regency Waikiki Beach Resort and Spa. As hotels have seen less revenue in 2009 than forecasts, default can be a possibility.
With $1.34 billion in cash post-ipo and $858 million in debt, H will have slightly less than $3 in net cash per share post-ipo.
H does not plan on paying dividends.
As noted above, H has seen a significant decline in revenues in 2009. Revenue per available room dropped 20%+ in 2009 as compared to 2008. Total revenues decreased 18% for the 6 months ending 6/30/09 compared to the six months ending 6/30/08.
Owned and leased hotels account for 53% of revenues, management/franchises account for 41%.
Occupancy rates for all US properties the first 6 months of 2009 was 64%, for international properties 57%.
**H is coming public in range below book value.
2009 - Revenues should be approximately $3.3 billion, an expected 13% drop from 2008. Operating expense ratio should be 96%, a drop from 2008's 91%. H has attempted to cut costs in 2008, however occupancy rates and room rates declined so significantly it severely impacted operating expense ratio. Operating margins should be 4%. There are a few one-time charges here that need to be folded out so the eps below will differ from GAAP for 2009. Factoring in non-operating charges and income plus taxes, net margins should be 3%. Earnings per share should be approximately $0.60. On a pricing of $24.5, H would trade 41 X's 2009 estimates. Note that in the previous five years, H earned substantially more on the bottom line than '09 estimates. While the P/E ratio looks pricey here, this is a bit of a 'trough valuation' on ipo assuming the bottom line will pick-up once again beginning in 2010. Until we begin to see a pick-up again in operating margins, forecasting 2010 here is quite difficult.
Marriott(MAT) and Starwood(HOT) are H's two closest public comparables. A quick look at all three.
H - $4.26 billion market cap at a pricing of $24.5. Below book value with a little under $3 in net cash per share on hand. Revenues of $3.3 billion trading $41 X's '09 estimates with an expected 13% annual revenue decline.
MAT - $6.9 billion market cap. 2.7 X's book value with $650 million in net debt. Revenues of $5.44 billion trading 15 X's '09's expected estimates with an 8% revenue decrease.
HOT - $5.69 billion market cap. 3 X's book value with $3.7 billion in net debt. $4.7 billion in expected revenues trading 45 X's '09 estimates with a 20% expected decrease in revenues.
Conclusion - Brand name coming book value with net cash in the bank has to be a recommend in range. A few issues here also though that prevent this from being an enthusiastic recommend. First of all the company structure is awful for new investors as it favors the Pritzker family heavily. The issue here is that the Pritzker family can unload a large percentage of their holdings onto the market over the next few years and still control H as long as they retain a 15% overall interest. Second, again here we are seeing a large ipo coming public without fully discounting the nasty recession and operational slowdown. In essence we still are not seeing 'deals' in the ipo market that reflect the economic reality of the past year. H is being priced/valued as if business will return to normal sometime in 2010. If it doesn't, H is not being priced at a rock bottom valuation. Having written that, I do like their balance sheet is in much better shape than the competition and they are coming public right around book value. Recommend here in range.
November 12, 2009, 5:26 pm
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