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Morgans clears debt, will focus on management
April 8 2013

With its largest shareholder gearing up for a proxy battle, Morgans Hotel Group Company inked a deal that will clear away $230 million of debt and sell its Delano South Beach property.

Highlights
  • Morgans is transferring ownership of the Delano South Beach to The Yucaipa Companies in exchange for the cancellation of certain securities held by Yucaipa.
  • The Hudson Hotel in New York, the only remaining property owned by Morgans, could be monetized, CEO Michael Gross said.
  • OTK Associates plans to nominate a slate of seven candidates to Morgans’ board of directors.
By Shawn A. Turner
Finance Editor
Shawn@HotelNewsNow.com

Updated 8:46 a.m. Eastern Standard Time, 8 April 2013

NEW YORK—OTK Associates LLC commented on the postponement of Morgans Hotel Group Company’s recently announced rights offering and recapitalization plan pending a hearing for a preliminary injunction in Delaware Chancery Court.  The hearing is expected to be scheduled before 15 May.
“OTK is pleased that the Morgans Hotel Group agreed to delay the rights offering, as OTK had requested in its motion for a temporary restraining order. All shareholders should be deeply troubled by the current board of directors’ continued waste of corporate assets to advocate for a coercive and dilutive transaction that OTK believes is invalid. Further, the use of company funds to change shareholder voting rules and diminish voting rights calls into question this board’s fiduciary duties and responsibilities,” OTK said in a statement.    
“OTK looks forward to presenting to the Delaware Chancery Court its case that the company’s recapitalization plan is invalid under Delaware law and requesting that the court invalidate the board’s decision to retroactively postpone the 2013 annual meeting and reset the corresponding record date,” the statement continued. 
Posted 8:11 a.m. Eastern Standard Time, 2 April 2013

NEW YORK—Two weeks after its largest shareholder initiated a proxy battle, Morgans Hotel Group Company announced its own plan to clear away debt and grow the hotel management side of its business.

Morgans on Monday said it has agreed to transfer its ownership interest in the Delano South Beach and nightclub operator The Light Group to The Yucaipa Companies in exchange for the cancelation of various Morgans securities held by Yucaipa. The agreements with Yucaipa eliminate debt and preferred stock obligations by $230 million. Morgans will continue to operate the Delano pursuant to a long-term management agreement.

Morgans also announced a $100-million rights offering to equity holders. Proceeds will be used to retire the credit facility secured by the Delano South Beach, expand the company’s business and for general corporate purposes.

Yucaipa officials did not return a call seeking comment prior to deadline. According to a Bloomberg report, Jason Kalisman, a Morgans director and founding member of OTK, sued Morgans on Monday in an attempt to prevent the Yucaipa deal from taking place.

The deal leaves Morgans with just one owned asset, the 886-room Hudson Hotel in New York. There are a total 13 properties globally in Morgans’ portfolio. The company could yet look to “monetize” the Hudson property, CEO Michael Gross said Monday during a conference call with analysts.

Gross said Morgans will focus its strategy on managing rather than owning hotels. “This deal … dramatically strengthens our balance sheet and better positions us for future growth,” he said.

He said the company has a strong pipeline of management deals with which to work. The company is in discussions to operate hotels in Europe, the United States, Latin America and Asia in such markets as Amsterdam, Berlin, Los Angeles, Rio de Janeiro, as well as several sites within India.

Morgans will look to have eight deals in place during the next three years, Gross said. Next year, the company will open three hotels during the first half of the year and two during the second half, he said.

“Three to four openings a year on an annual basis is something we believe is sustainable for a very long time,” he said.

An analyst questioned the Morgans team during the call over whether there was any concern the company would be greatly shrinking its size because of the Yucaipa deal.

“I think our long-term goal is very much to maximize value and get our share price as high as possible in a reasonable amount of time,” Gross said.

He added: “We recognize that we can continue to grow this business, but we also recognize this is a business that requires scale, and meaningful scale.”

Proxy battle
On 18 March, OTK Associates said it intended to nominate seven candidates to Morgans’ board of directors. OTK is Morgans’ largest shareholder with an ownership stake of approximately 14%, or 4.5 million common shares.

OTK noted that Morgans’ shares and performance have not recovered value quickly enough in the five years since the economic downturn began. The shares closed 1 April at $6.16 per share, up 11.2% year to date.

The company reported a net loss of $12.5 million for the fourth quarter ending 31 December 2012, compared with a loss of $17.7 million during the same period a year earlier.

“After five years of observation, OTK views it impossible, based on the company’s performance over time, to effect sweeping and necessary change without replacing substantially all of the current board,” OTK’s statement reads. “The slate we are proposing has been constructed to refocus the company on its core business, extend its collection of world recognized brands and to right-size its operating cost structure.”

Regarding OTK’s proposal, Gross emphasized the strategic review process Morgans underwent that resulted in the Yucaipa deal was a 15-month process.

“We were open with shareholders that we carefully explored all the alternatives, and we are confident this was an important step to grow value,” he said.

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