How Goldman and the Waltons lost a bundle

Hyatt has proved to be a money pit for the Wall Street firm and the mega-rich family. An inside look at a billion-dollar investment gone bad.

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By Allan Sloan, senior editor at large

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NEW YORK (Fortune) -- Did you make bubble-era investments that left you so far underwater you needed a submarine? If so, you've got company. Gather round, and I'll show you how some of the smartest and richest folks in America lost more than half a billion dollars by buying into the commercial real-estate bubble in the summer of 2007.

The losers are Goldman Sachs (GS, Fortune 500), arguably the smartest and shrewdest Wall Street house in the country; and the Walton family (as in Wal-Mart (WMT, Fortune 500)), America's richest.

Goldman and the Waltons put $1 billion into Hyatt Hotels Corp. in a private deal a little over two years ago -- at a price per share more than double that contemplated by Hyatt in its forthcoming initial public offering.

This IPO has come under fire on corporate-governance grounds, because Hyatt's founding Pritzker family could retain operating control even if its ownership stake dwindles to as little as 25%, from its current 85%. But the part of the offering documents that I find most interesting doesn't involve governance -- it involves the Goldman-Walton losses.

Hyatt filings reveal that in August 2007 -- near the peak of the commercial-property bubble, though the documents don't mention that Goldman, some of its investment clients, and a Walton family investment company bought a combined $1 billion of stock from Hyatt. This money -- $575 million from Goldman, $425 million from the Waltons -- gave Hyatt cash it needed to buy back $1.1 billion of stock from members of the Pritzker family.

The exiting Pritzkers got $61.42 a share, which is the price that Goldman and the Waltons paid to buy in. That's more than double the $23 to $26 per share that Hyatt expects its stock to fetch in the IPO, which could happen this week.

The Waltons and Goldman subsequently bought more shares from Hyatt, apparently at $26 or so, lowering the average per-share cost of their overall investment to about $50 and $52, respectively, by my math. I'm basing this number (and the rest of this article) on my reading of Hyatt documents, because Hyatt, Goldman, the Pritzkers, and the Waltons all declined to talk, because the Hyatt IPO is pending.

No one needs to shed tears for Goldman or the Waltons, who aren't likely to qualify for food stamps anytime soon. But the Hyatt investment shows that even gods sometimes have feet of clay.

It's not clear how much of Goldman's losses are the firm's, and how much are its investment clients'. It is clear that Goldman's purchase of Hyatt stock is part of a longstanding Goldman-Pritzker relationship. Goldman stands to get an eight-figure fee as the lead underwriter of the Hyatt IPO, which makes its paper loss on Hyatt stock easier to bear.

The Pritzkers, once a united family that controlled a vast empire, have split apart in recent years, with lawsuits and bitterness abounding. The Pritzkers have sold most of Marmon Group, a sprawling conglomerate, to Warren Buffett's Berkshire Hathaway (BRK.B), which is buying the rest in stages. And there's Hyatt, which seems to be going public primarily to offer Pritzkers a way to cash in their shares without the company having to raise cash to redeem them.

Agitation over corporate-governance aspects of this offering has come not from the usual goo-goo (as in good governance) types, but from Unite Here, a hotel- and casino-workers union that is trying to organize Hyatt employees. The union's critique, posted weeks ago on a Website called HyattIPOwatch, had flown largely under the radar until Monday, when the union began publicizing the site.

"This offering lacks accountability to public shareholders, and we think that's bad for all stakeholders, workers and investors alike," Matt Walker, a union vice president, told me last week. (Yes, I looked at the Hyatt offering because Walker got me interested in it. No, this article isn't the union's take, it's my own.)

Should you leap at the chance to buy Hyatt stock for less than half the price Goldman and the Waltons paid in 2007? And for less than the stock's per-share asset value? I don't know. I do know one thing, though: if you buy in the offering and things turn out badly, you can always console yourself with the knowledge that you still did better than Goldman and the Waltons did. To top of page

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