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The restructuring will transform Morgan from owner/operator of hotels into a brand and management company, something a lot of upscale brands are increasingly looking to do.

Morgans Hotel Group Co., the boutique-hotel operator under pressure from its largest shareholder, said Yucaipa Cos. will swap interests in the company’s convertible notes and preferred stock for its ownership in the Delano South Beach and the Light Group.

Morgans will continue to manage Delano South Beach in Miami Beach, Florida, as part of a long-term agreement, the company said today in a statement. Morgans also said it will start a $100 million rights offering available to shareholders, which Yucaipa, billionaire Ron Burkle’s investment firm, will backstop with no fees if the rights are not exercised in full.

Morgans, which put the Delano South Beach on the market last year, has been selling real estate and using the proceeds to expand its management operations. The deal with Yucaipa follows a 15-month strategic review by a special committee of the board, the New York-based company said.

“We have transformed the company from an owner/operator of hotels into a global brand and management company,” Chief Executive Officer Michael Gross said on a conference call with analysts. “Today’s announcement marks the significant step forward in realizing that strategy, allowing us to accelerate the growth of our business, significantly reduce our risk profile and enhance our ability to create long-term value for all of our shareholders.”

Director Lawsuit

Jason Taubman Kalisman, a director on Morgans’s board and a founding member of its largest shareholder, OTK Associates, today sued the company, seeking to block the planned “recapitalization” until the case is heard before a Delaware judge. Yucaipa was also named in the lawsuit, which was sealed except for a cover sheet with a brief description of the claim.

OTK said last month it was seeking to overhaul the board, aiming to return the company to profitability or have it pursue strategic alternatives. Morgans has lost money in every quarter since 2007, according to data compiled by Bloomberg.

Kalisman declined to comment. Dan Gagnier, a spokesman for OTK at Sard Verbinnen & Co., couldn’t be reached for comment on the lawsuit.

Morgans gained 4 percent today to $6.16, the highest closing price since Dec. 19.

The company has eight signed management deals for hotels that will start over the next three years, which, combined with last September’s opening of Delano Marrakech, will almost double the number of rooms under management, Gross said. The company is in advanced discussions for deals in Los Angeles, Amsterdam, Berlin, Paris, Rio de Janeiro and several cities in India, he said.

Debt Reduction

The transactions announced today will reduce Morgans’ debt and preferred stock obligations by $230 million, including the elimination of $113 million of debt maturing in 2014, the company said. After retiring the credit facility secured by Delano South Beach, which has $35 million of outstanding obligations, the company said it will have $65 million of cash left from the rights offering.

Burkle is a member of Morgans’s board. Whether Yucaipa continues to have representation on the board will depend on the outcome of the rights offering, Gross said during the call with analysts.

The transaction was negotiated through a special committee of independent directors since Yucaipa is a creditor with board representation, Gross said. The company also retained its own independent financial and legal advisers “to ensure we receive fair value for our assets,” he said.

Morgans acquired a 90 percent interest in the Light Group, an operator of restaurants and nightclub bars, in 2011. The transaction with Los Angeles-based Yucaipa is expected to be completed in the second quarter, Morgans said.

–With assistance from Phil Milford and Jef Feeley in Wilmington, Delaware. Editors: Kara Wetzel, Christine Maurus

To contact the reporter on this story: Prashant Gopal in Boston at [email protected]

To contact the editor responsible for this story: Kara Wetzel at [email protected]

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Tags: morgans

Photo credit: Morgan's Mondrian South Beach, its new hotel-residence in Biscayne Bay, Miami.

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