Morgans Hotel Group began trading on the NASDAQ stock market yesterday (Tuesday) when its $20 a share price slipped 2%.
The company is raising $360m, but the net proceeds will be $275m which will be used to pay down debt. The big winner looks to be Ian Schrager, the company's founder who left as CEO in the summer.
RSA Associates, an entity controlled by Schrager, is selling 450,000 shares in the IPO for about $9m. It will retain 2.3 million shares, 6.4% of the company, worth about $46m.
Another big payday for Schrager comes with his contract. He is to receive just over $1m for last year, $750,000 for this year and $500,000 for next year. In addition, he is to receive bonuses of about the same amount each year.
Since exiting as CEO, chairman and president, Schrager has been retained as a consultant. He will continue in this role but he has no exclusion clause and may compete head-on with the company.
His contract sees him retain the services of a driver and secretary and he will have nearly all his other expenses met.
The largest private seller in the IPO is NorthStar Capital, the investment firm co-headed by Ed Scheetz who is also CEO of Morgans. NorthStar is netting $40m but will retain a stake worth 28%.
Morgans has been struggling to make money due to its indebtedness. In the first nine months of 2005, while revenue was up 12% to $190m, it made a net loss of $29m. Interest charges have wiped out profits every year since 2000 and the flotation prospectus warned that substantial net losses are expected for the foreseeable future.
The proceeds from the IPO retained by the company will be used to pay down debt which stood at $660m at the end of September last year. It will see net book value per share turn positive to $1.47 from minus $11.51.
Some of the cash raised will also be used to finance the purchase of the James Hotel Scottsdale, near Phoenix, Arizona, which was bought for $47.5m in January. Morgans also has projects underway in Las Vegas.
The two London properties, owned in a joint venture with Burford Holdings, were refinanced at the end of last year. The properties had been put up for sale but a £107.5m credit facility was arranged instead.
Since leaving Morgans in a full-time role, Schrager has focused on residential projects in New York and a budget hotel in Miami, the Riande Intercontinental. He claims the latter is a real estate investment rather than something he intends to run.