Is Hyatt A Takeover Target Or Just A Short?

Source: Hyatt Investor Relations

As for Hyatt’s notion of “luxury” I couldn’t agree more about Park Hyatt and most Grand Hyatts. But Andaz? I’ve stayed in three, two of which were converted to Andaz from Hyatts I previously enjoyed. They are staffed by persons in the Abercrombie and Fitch (NYSE:ANF) mold. Check-in consists of staff looking down their sniffly little noses in the classic “Are you certain you belong at an Andaz?” look, followed by a “Very well, I suppose you paid so we shall deign to give you a key” half-smile. It’s supposed to be hip and trendy. It doesn’t work.

I will accept their “Upper Upscale” moniker as well, but a Hyatt Place upscale? “Focused on high-end travelers?” Really? These are very nice rooms and fulfill the old Holiday Inn pledge of “no surprises.” I’ve stayed at for a fair price and a good location. But I don’t see dining cheek-by-jowl for a nothing-special breakfast in a too-small dining area upscale. I’m not being picky here – I am simply concerned that if this is what Hyatt considers upscale they are wearing rose-colored glasses.

Further on, they discuss “Recent Activity.” I applaud their capital strategy of selling $1.5 billion of gross real estate assets. The problem is they are years late in so doing. This is a trend well in force already by all their competitors – see Hilton’s spinoff of 67 touchstone properties worth $9 billion to form Park Hotels and Resorts (PK). As for brands, they note they acquired Miraval and exhale “including three resorts” from Miraval. Marriott is acquiring thousands of rooms, Hyatt is buying three resorts.

Then they talk about share repurchase as if that is somehow germane to their future plans. Mixing apples and oranges, they talk corporate strategy and stock price in the same breath/ What are they thinking? Who is in charge here?

Which brings me to the real problem: drifting. What does Hyatt stand for these days? It was once “The Hyatt Touch.” Friendly and capable staff, well-maintained rooms, and quality touches throughout in fine locations. At Andaz, they are clearly “touched” but that is hardly the same thing. The Hyatt was where, if you ran out of shave cream they didn’t direct you to the gift shop, they brought some up. If they failed to deliver a newspaper they just said, “One moment. I’ll get one from the bell desk for you.” The little things. The Hyatt Touch.

That is no longer in evidence at many properties. It is now about the money. I expect to pay more for a Hyatt Regency than a Hyatt Place. But no more. If there is a Hyatt Regency at 85% occupancy a couple miles less desirable and a Hyatt Place at 95% occupancy where it is most convenient for most travelers, you might find the Regency at $145 and the Hyatt Place at $245. Hyatt cannot train guests to believe in their “tiered pricing structure” then violate it whenever they can make an extra buck.

With this airline pricing of rooms (whatever the traffic will bear, which all chains use to a certain degree) Hyatt is making more money in the short term but destroying both guest loyalty and traveler certainty of finding no unwelcome surprises. More on all this when we come to the qualitative problems but first “the numbers:”

Hyatt has also gotten deeply into the timeshare business. Some of our favorite old resorts that had the room to expand have seen the hotel on that property shrink and the timeshare, which Hyatt of course prefers to call the Hyatt Residence Club, take over many of the rooms. (These are typically multi-building properties or those with contiguous land available.)

I understand the benefit of timeshares to the seller – you get a big chunk of cash up front and can then charge high maintenance fees, too. I understand the profit motive and certainly Hyatt is not alone. But the others with timeshare / vacation clubs, like Hilton and Marriott, are upgrading their hotel properties and loyalty programs as well.

It is in this last area that I see Hyatt really shooting itself in the foot. They have long had a fine loyalty program called “Gold Passport.” In 2013, 2014 and 2015 Hyatt was awarded the Freddie Award (see freddieawards – despite the name, hoteliers and airlines take this award very seriously) for best Elite loyalty program. When you win something three years in a row, most people would enhance it or leave it the heck alone.

Not Hyatt. They completely revamped the program. They no longer have Silver, Gold and Diamond levels that have a reasonable frame of reference. The entry-level is now “Discoverist” (not a discoverer but a new made-up word. Someone at Andaz must have dreamed this one up!) Then one becomes, either by staying or by spending more money, an Explorist. Finally, by staying 60 nights per year or gaining “base points” by spending lots of money one becomes a Globalist.

As a Diamond member, one needed 28 separate stays. Nice and simple. And after achieving that level the frequent traveler received room upgrades as the staff had them available, a welcome amenity (like an appetizer or some such,) breakfast for up to 4 persons, and a host of little favors like free newspapers, etc.

I am reminded of the tale of two girls working in a candy shop. One was always more popular than the other even though both had the same charming personality and dealt with customers the same way – except. Except that one girl would always over-fill the whatever size, call it a half pound, of candy, then begin removing pieces to get back to one half pound. With each piece removed, the customer felt as if something was being taken away. The other girl would always under-fill then, to the customers’ delight, keep adding pieces. Both always sold exactly the same half-pound.

Take note, Hyatt. You took away the welcome amenity, you took away the unexpected and delightful upgrades, you took away the morning paper, etc. And you replaced it with a program that rewards only those who choose to spend one-sixth of every year in a hotel room (and not just any hotel; only your hotels!) or those who choose to spend wildly on very high-priced food, drink, spa treatments, etc. Present it any way you like; it is seen by the public that you only care about the money.

I am afraid for Hyatt’s sake that I am not the only one who won’t give my loyalty to any company that doesn’t give loyalty in return. There was a conference call to sell this new program last year and management truncated it early because of the furor the changes caused. One of management’s weak responses from taking the minimum number of nights to be a “Globalist” from 28 to 60 was that, at Marriott, you need 80 nights. What the senior mucky-muck presenting the new program chose not to realize is that Marriott has nearly 10 times the locations! With Marriott, travelers can find numerous properties no matter where they are.

At Hyatt it seems, at least for their highest tier, they are only seeking expense-account road warriors and not families on vacation, small and medium sized business owners who travel occasionally, or retirees looking to expand their horizons. The benefits that used to accrue to all those are now reserved for those on the road regularly and spending freely.

Of course, most of the time these road warriors are not people spending their own money like families and retirees and small business owners. They are instead on the corporate dime and the corporation has reached an agreement with Hyatt to offer special rates. Once you Pareto Principle yourself into fewer and fewer sources of income, what do you do when Big Company X with 14,000 traveling employees gets a better offer from another hotel chain? Hint: you might lose 14,000 guests with no personal loyalty to you all at once.

So. To answer the question I posed in the title: Is Hyatt Hotels a takeover target or just a short? I have no inside information. Personally, I would not consider shorting the stock. I think Hyatt's properties and reputation for excellence in service make them a juicy target for a competitor looking to extend its high-end traveler portfolio

To stave off such a moment, the Board needs to shake things up. They do have some heavy hitters in their group and a second- and third-generation Pritzker as well. The best time to shake things up was yesterday. The next best time is today. I will not buy Hyatt at its current price and current approach to meeting competitive threats. On a major pullback, thinking like an acquirer and wishing them the best, I certainly would.

PS -- If you have your own favorite hotels in desirable travel locations or in business centers, let me know. I am now looking forward to trying new hotels that may be favorites of yours, as will other Investing.com readers!

Disclaimer: Do your due diligence! What's right for me may not be right for you; what's right for you may not be right for me. Past performance is no guarantee of future results. Rather an obvious statement, but too many people look only at past performance instead of seeking the alpha that comes from solid research and due diligence.