The Real Deal Miami

Delano hotel wins small victory in board fight

Morgans announces recommendation against OTK slate

June 05, 2013 02:00PM

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From left: Michael Gross, Ian Schrager and the Delano Hotel

From left: Michael Gross, Ian Schrager and the Delano Hotel

The hotelier that owns the Delano South Beach scored a small victory in a battle for control of its board when a proxy-advisory firm recommended that its shareholders not vote for the nominees put up by its biggest shareholder, Bloomberg reported.

Morgans Hotel Group Co., founded by developer Ian Schrager and Studio 4’s Steve Rubell, announced the recommendation today; Institutional Shareholder Services Inc., according to Morgan CEO Michael Gross, identified “significant deficiencies” with the seven candidates offered by OTK Associates LLC that makes them “incapable of representing the interests of all shareholders.”

OTK owns about 14 percent of New York-based Morgans, which wants to fill six of the seats. The seventh director would be chosen by OTK, proportional to its share of ownership. OTK did not respond to Bloomberg’s request for comment.

Current board members are set to meet June 14 for their annual meeting.

The fight stems from OTK’s goal of returning Morgans to profitability. Morgans is struggling to recover from a bad deal it made during the height of the financial crisis — a $72 million infusion of cash from investment firm the Yucaipa Companies, founded by billionaire Ron Burkle.

“OTK has failed to offer a credible plan to create value for shareholders and address Morgans’ significant balance sheet and capital structure challenges,” Gross said in a statement. Gross is Yucaipa’s director on the board.

On Tuesday, Morgans announced that it has received five expressions of interest in a takeover and would consider a sale. The news sent Morgans stock to its highest price in almost two years.

In the 2009 deal, Yucaipa gave the money through a private investment in public equity, or PIPE, in exchange for: as many as 12.5 million shares; the right to nominate a director, who turned out to be Gross; and veto power over a sale of the company or any of its assets as well as acquisitions worth more than $100 million.

Today, Yucaipa owns nearly 28 percent of Morgans, has bought $88 million of its debt and holds half of hundreds of millions of dollars of Morgans’ mortgage debt that is coming due in the next two years.

Now, Morgans is trying to undo its first bad deal with another complicated one, giving Yucaipa the Delano South Beach and its nightclub and food and beverage management business in exchange for cancellation of many options of the first deal. The second transaction, though, is on hold after being successfully challenged in court by OTK. [Bloomberg]Melanie Gray

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