Morgans spends millions trying to undo Burkle deal

From left: the Delano South Beach in Miami and Ian Schrager
From left: the Delano South Beach in Miami and Ian Schrager

UPDATED, 6:31 p.m., May 29: The Morgans Hotel Group, founded by developer Ian Schrager and Studio 54’s Steve Rubell, is spending tens of millions of dollars on lawyers and bankers to undo a transaction that landed it $72 million in late 2009 from Ron Burkle’s Yucaipa Companies, the New York Times reported.

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; 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 has its director, Michael J. Gross, in charge of the company. It also holds half of hundreds of millions of dollars of Morgans’ mortgage debt that is coming due in the next two years. Schrager is no longer affiliated with Morgans.

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The company, which owns the Mondrian Soho boutique hotel, is trying to undo its first bad deal with another complicated one, giving Yucaipa the Delano South Beach boutique hotel in Miami 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 Associates, an investment vehicle run by the Olshan and Taubman real estate families that owns 13.9 percent of Morgans.

Now, OTK, which voted for the 2009 transaction, is running a slate of seven directors to try to unseat the Morgans board at its June 14 annual meeting. [NYT] — Melanie Gray