Morgans Hotel Group has appointed Morgan Stanley to evaluate “strategic alternatives” which could include a sale of the company.
The announcement comes after more than a year of pressure on the group from several shareholders for a sale.
The company said that it had directed Morgan Stanley to “reach out” to possible parties regarding their interest in potential transactions “that could provide Morgans an opportunity to maximise value for its stockholders”.
The group’s special transaction committee is looking at all alternatives, including capital raising, asset sales, strategic partnerships, a sale of the entire company, a sale of component parts of the company, acquisitions and other alternatives.
One year ago this month saw Ron Burkle, managing partner at Yucaipa, Morgans’ largest stakeholder, write “Get Morgans on the market and sell it to an appropriate buyer. It’s time to sell now for all stockholders’ benefit,” in a letter to chairman Jason Kalisman, who took over as interim CEO after Michael Gross resigned.
In a regulatory filing, which Burkle addressed to Kalisman, he said: “Since you took over you have not given one update as to any sales process or inquiries. I believe you are in breach of your obligation to provide us with observation rights as well as your fiduciary duties to the stockholders of the company.
“Stop playing with the company as though it’s your new toy. Get Morgans on the market and sell it to an appropriate buyer. Stop acting like a spoiled child … It’s time to sell now for all stockholders benefit.”
Burkle had support in the form of Kerrisdale Capital Management, which holds over 4% of Morgans stock and filed a letter supporting him, reading: “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.”
Since then, the company has been bogged down in ongoing noise from its shareholders, earlier this year describing Kerrisdale Capital Management as “self-serving” and “reckless”. The comments came after Kerrisdale Capital Management called for the group to be sold immediately, preferably to a global hotel operator, despite complaints by Morgans that it had “laid the groundwork for significant value creation going forward”. Shareholders Caerus Global Investors has also joined the clamour for a sale.
The company, which is due to open a hotel under its Mondrian brand in London and the Delano Las Vegas, in September, responded that it 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 appointment of Morgan Stanley followed the group’s second quarter results, in which Kalisman said that he was “pleased with Morgans Hotel Group’s continued progress during the second quarter, and believe that our improved results reflect the significant effort over the last year to return the company to solid footing”.
The company cut its loss, with a net loss of USD9.7m, against a net loss of USD16.0m in the same period last year, which it credited to improved operating results and margins and decreased corporate expenses. Adjusted Ebitda was up 17.7% to USD14.8m, with revpar up 6.4%.
The group has continued to pursue asset-light expansion, with the Delano Las Vegas, a 1,117-room hotel at Mandalay Bay, to be operated under a licence agreement with MGM and the Mondrian London, a 359-room hotel, operated under a long-term management agreement.
Additionally, the company has a franchise agreement for 10 Karakoy, a 71-room Morgans Original in Istanbul, which is expected to open by the end of 2014 and a management agreement for a Mondrian in Doha which is expected to open in the second quarter of 2015.
HA Perspective [by Chris Bown]: The latest update from the embattled Morgans board appears to have been in response to further pressure to throw a bone to agitating shareholders.
The company has continued to perform weakly in recent years, revving up the excitement of those shareholders in wishing things were done better. Operational results are improving, so what is the best exit? The group manages over 3,700 rooms across its Delano, Mondrian, Hudson brands and a range of individual, non-branded properties.
A property disposal is one option, to create a pure asset light hotel operator: the group wholly owns hotels, the Hudson New York and Delano South Beach. It holds stakes in two further properties, 50% of Mondrian South Beach 20% of Mondrian in New York.
Alternatively, there could be a disposal of the brands. It is not clear what value the “originals” collection has – effectively a bunch of managed independents – while the other three hotel brands all offer potential for expansion under new owners. One question then must be what value the Delano, Mondrian and Hudson names have – something that no two accountants are likely to agree on. The other question is that of who will be interested in bidding; Morgans likes to talk of “lifestyle brands” rather than just hotel flags – will anyone else share their view.