Given the current consumer climate, why would any hotel go public?
The financial crisis and recession have punished the hotel industry, which carried too much debt and very little cash. Marriott, for example, carried a PEG of more than five, was about $34 billion in debt, and had only $168 million in cash on hand.
The University of California said, "as many as one in five U.S. hotels may default on their loans by the end of 2010," as companies and consumers spend less on travel. And Real Capital Analytics, which tracks distressed commercial property, "expects hotel defaults to increase by as much as $2 billion next quarter. . . "
Extended Stay filed for bankruptcy protection. And Red Roof Inn couldn’t afford to keep the light on, defaulting on $367 million of securitized mortgages.
Heck, according to Steve Christ, occupancy at Red Roof’s properties — which averaged 62% at the market peak — has fallen to 50.7% this year. That matches the downturn of the U.S. budget hotel industry, which registered a 9.7% decline in occupancy in the first five months of this year from the same period last year, according to Smith Travel Research.
Even Hyatt Chairman Thomas J. Pritzker was bearish on the state of the travel industry, noting that big-spending consumers are opting for lower-priced hotels.
Long story short, hotels in this economy were and are in real trouble. . .
So why bring a new hotel IPO to market?
You see, unlike the hotels mentioned above, Hyatt isn’t burdened with debt. As of June 30, Hyatt had $968 million in cash and only $612 million of debt. It’s benefiting from strong growth and its cash flow has nearly doubled between 2004 and 2008.
But recently, Hyatt’s revenue fell 19% in the first half of 2009 and cash flow fell about 50%. It posted a loss of $36 million in the first half of 2009, down from a profit of $173 million a year earlier.
So, again, why bring a new IPO to market in this climate? It’s not as if Hyatt needs the money. . .
The answer lies with the Pritzker family, who filed with the SEC to issue shares worth $1.15 billion in an offering managed by Goldman Sachs. The only thing we don’t know is what percentage of the company it plans to sell. But the filing does state that the family will not give public shareholders voting control over the company.
But why now?
There is some speculation surrounding Hyatt’s announcement of its IPO decision, primarily whether politics in the Pritzker family (which holds 85% of the company) is playing a role. A family feud resulted in an agreement to divide the Hyatt empire among 11 adult cousins in the family by 2011, and family members will have the right to sell their shares whenever they want.
Others speculate that the company could use the raised IPO money as working capital to build its property portfolio, given the fact that distressed assets are available.
So how do you profit from the family feud and the eventual Hyatt IPO?
First, you can buy Hyatt out of the gate. It should trade under "H" by fall.
And second, you can buy its competitors like Marriott (MAR), Intercontinental Hotels Group (IHG), and Starwood (HOT) . . . not for the long term, though. You simply want to buy these names as we get closer to a possible Hyatt IPO.
And third, you can buy the U.S. IPOX-100 index, which includes the 100 largest, typically best-performing, and most liquid IPOs in the United States. It measures the average performance of U.S. IPOs during the first 1,000 trading days.
We’ve already seen it race from $18 to $26 on the heels of MasterCard (stock ran from $43 to $200) and First Solar (stock ran from $24 to more than $220). We saw it run on Visa’s IPO (from $21 to $26) and we could see it run up again on a successful Hyatt offering.
Good Investing,
Ian L. Cooper
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