• Morgans defends against sale

Morgans Hotel Group has described shareholder Kerrisdale Capital Management as “self-serving” and “reckless”.

Kerrisdale Capital Management has called for the group to be sold immediately, preferably to a global hotel operator, despite complaints by Morgans that it has “laid the groundwork for significant value creation going forward”.

Kerrisdale Capital Management, which holds around 4% of Morgans stock, said last week that it would seek to nominate a new board of directors, including three of its own executives. Sahm Adrangi, chief investment officer at Kerrisdale Capital Management, wrote in a letter to Morgans shareholders: “Kerrisdale believes that the current directors of Morgans Hotel do not adequately represent the interests of the majority of shareholders. We believe that the views of OTK Associates, which owns less than a 15% economic interest, are currently over-represented on the Morgans Hotel board, and the views of the other 85% of shareholders are severely under-represented.”

The company has joined shareholders Caerus Global Investors and creditor Yucaipa Companies in a call for a sale. The group said that it would support a sale either of the group as a whole or in pieces.

Adrangi added: “Morgans provides an attractive luxury boutique hotel platform for an international hotel company. A well-capitalised and proven global operator can effectuate the expansion of the Mondrian, Delano and Hudson brands far faster and at better economics than the currently undercapitalised Morgans.”

In response, Morgans said that the company had kept the “promises” made when the last board was “decisively” elected at last year’s AGM through the actions of shareholder OTK. The group said: “We believe we have laid the groundwork for significant value creation going forward.  In just nine months, this board has overseen improved earnings, the significant reduction of a previously perilous corporate expense structure, important steps toward the resolution of costly litigation and the de-risking of a legacy balance sheet.”

The company said that it had seen a 52% increase in the group’s share price since making the changes and that the debt refinancing at Hudson and Delano South Beach had given the group improved liquidity and flexibility. It described the efforts by Kerrisdale to liquidate the group as premature and likely to rob Morgans' stockholders of the value ‘that rightfully belongs to them” describing the private investment management firm as “self-serving”.

Taking its comments to a more personal level, Morgans said that “Sahm Adrangi's campaign is emblematic of someone with zero public company experience.  His unqualified slate of colleagues and cronies shows the obvious lack of interest by serious industry professionals from wanting to associate themselves with Mr. Adrangi, his fund and history of PR campaigns. We believe Kerrisdale's self-interested pursuit of a proxy fight is motivated primarily by a desire to seek publicity.”

The spat is the latest in a series of quarrels centred around Morgans. As has been previously reported in Hotel Analyst, OTK was the last group associated with Morgans to use the phrase ‘self-serving’, this time directed at the Morgans’ board. This latest effort from Kerrisdale Capital Management will not come as a surprise to Morgans, the group having said last year that it would look to change the board at the next AGM and supported calls by Yucaipa for a sale, writing: “We believe that the overwhelming consensus view of the company’s ownership is that Morgans should initiate an immediate public sale process to sell the company to one or multiple strategic acquirers”.

The latest rumblings came as Morgans reported full year adjusted Ebitda of USD45.1m, an increase of 97.3% from 2012, primarily due to the impact of the company's renovation of the Hudson hotel in New York, which started in late 2011 and continued throughout 2012. Adjusted Ebitda for the fourth quarter was USD16.1m as compared to USD12.7m for the same period in 2012.

Revpar increased by 8.9% in 2013 compared to 2012, primarily driven by a 7.8% increase in occupancy. The group recorded a net loss of USD44.2m, compared to a net loss of USD56.5m for 2012 due to improved operating results.

The group has continued to pursue asset-light expansion, most recently signing a 15-year franchise agreement for a Morgans Original branded hotel in Istanbul, including a USD700,000 key money investment from itself.

The company currently has signed management agreements to manage four hotels that are financed and under construction, consisting of a Mondrian project in London, a Mondrian project in The Bahamas, a Mondrian project in Doha, Qatar, and a Delano project in Moscow.

 

HA Perspective [by Katherine Doggrell]: Who’d be on the board of Morgans? Well no-one who was worried about it becoming a long-term commitment, that’s for sure. Another year, another AGM, another likely change in the board.

But while the back room grumblings remain the same, the company itself has been changing. As it protests, things are looking better. Debt has been reduced and the group has settled its lawsuit with Yucaipa. The group announced in its results that it would be cutting one third of its corporate staff as part of ongoing cost reduction.

It continues to operate at a loss, but has renovated the Hudson – and not a moment too soon – and has a clear asset-light expansion strategy. Agreements such as the 15-year franchise in Istanbul may not be terribly inspiring, but with luxury and boutique brands popping up every minute (we await Hilton Worldwide’s this year) they must do whatever it takes to gain traction.

For all the nagging at the current board, it’s not doing a terrible job. The problem amongst the shareholders is that they are not doing it fast enough. Last year saw a USD7.50-per-share takeover offer on the table, from an unnamed hotel company. This was rejected as not good enough, but rumours have also linked the group – in whole or in parts – to interest from at least nine hotel companies.

At the time of writing, the group’s shares were at USD7.90, off the year low of USD5.70. For the investors, it’s time to cash in on the rise, aware as they are that asset-light expansion is good for the brand, but does not always make for a thrilling sale.

Rumour has it that, despite the protests, CEO Jason Taubman Kalisman is planning to sell the company after all, in the summer, on the back of increased earnings. In which case Adrangi’s campaign is nothing more than an ego war, as he looks to be at the helm when the sale process begins. Egos in boutique hotel-land? ‘Twas ever thus.
 

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