SBE Entertainment to Buy Morgans Hotel Group for $82 Million

After a lengthy battle that already included one failed attempt, Sam Nazarian's privately owned SBE Entertainment Group, which includes the SLS Hotels brand, has finally won its bid to acquire New York-based Morgans Hotel Group Co. for $82 million, paying $2.25 per share in cash for the outstanding shares of Morgans Hotel Group.

Nazarian will serve as CEO of the combined company and handle day-to-day management responsibilities. The deal includes the purchase of all of Morgans' brands, as well as buying Morgans' three owned properties (The Delano South Beach, Hudson Hotel in New York, and the Clift Hotel in San Francisco).

Together, the combined company will have 20 hotels and the Morgans transaction is worth an estimated $794 million. The acquisition is expected to close in the third or fourth quarter of this year, following regulatory and shareholder approvals. Under this agreement, Morgans shareholders representing 29 percent of the company's outstanding shares of common stock have signed voting agreements in support of the transaction.

Last week, reports surfaced that Los Angeles-based SBE Entertainment was close to signing a deal to buy the boutique hotel chain famously started by hotelier Ian Schrager in 1984 and credited with launching the first-ever boutique hotel.

Last year, both companies were reportedly close to signing a deal but the merger fell through in November when two Morgans Hotel Group board members clashed on the deal.

Ronald Burkle, a preferred-equity holder in Morgans and founder of The Yucaipa Companies and a friend of Nazarian, approved of the acquisition by SBE. However, Jason Kalisman, a board member whose investment firm, OTK Associates, which is Morgans' largest shareholder, did not. Kalisman served as former chairman and interim CEO of Morgans through May 2015, and was reportedly forced to resign as chairman and interim CEO due to his conflict with Burkle.

According to The Wall Street Journal, Burkle would have served as the chairman of the combined SBE-Morgans company under the deal proposed in 2015, and Burkle also would have purchased two of Morgans' hotel properties.

With the deal announced today, Burkle, who owns $75 million in preferred equity shares in Morgans, as well as warrants for common shares, will convert his company's existing stake in Morgans into a reported 25-percent ownership stake in SBE. SBE is acquiring Morgans' three owned hotel assets as part of the deal.

Global real estate investment firm Cain Hoy Enterprises, led by Jonathan Goldstein, is providing SBE with "a significant investment" to fund the acquisition. Cain Hoy and SBE have a history with each other: three of Cain Hoy's executives, including former CEO Henry R. Silverman, had joined SBE's board but left it in April 2015 only five months after joining and after lending SBE $167 million and committing $500 million to future SBE projects.

From the looks of today's announcement, it appears that with now CEO Goldstein at the helm, SBE and Cain Hoy are on good terms once again.

The Second Time's The Charm

So, how did the deal come together this time around as opposed to last year? Well, the fact that Morgans has struggled in the past year may have had a lot to do with it, making it that much more affordable for another company to buy it.

Today, Morgans Hotel Group has 13 properties in its global portfolio, but it has had a difficult past few years. In 2014, the company hired Morgan Stanley to explore strategic alternatives, including a possible sale, and the company has continued to see declining revenues in recent months. For the first quarter of 2016, Morgans saw a net loss of $8.9 million, and saw a 4.3% decline in revenues from the same period last year, dropping from $53.3 million to approximately $51 million.

In April 2015, the new owner of one of the group's properties, Alex Sapir, who bought the Mondrian SoHo out of foreclosure, successfully ousted Morgans as the hotel's operator; that hotel is now known as the NoMo SoHo and operates independently.

In the past year, Morgans Hotel Group stock dropped by as much as 88 percent from a high of $7.01 per share in May 2015 to a low of 86 cents per share in February. But news that SBE is close to acquiring the company saw its stock rise by about 14 percent on May 9. With its stock so low this year, Morgans would be a steal for any company wanting to purchase it.

This hotel merger/acquisition is just one of many that have taken place over the course of the past year, signaling hospitality companies' desires for more scale to compete not only against one another but also against online travel agencies and alternative accommodations providers.

Some of the most recent transactions have included InterContinental Hotels Group's purchase of Kimpton; AccorHotels buying the Fairmont, Raffles, and Swissotel brands; Marriott's pending deal to buy Starwood; and Carlson Hotels' sale to China's HNA Tourism Group.

Better Together?

Will SBE and Morgans be better off together? That's the big question. The Morgans Hotel Group transaction represents $794 million in enterprise value and both companies will have more than 25 hotels in their shared portfolio by year's end.

SBE, which manages luxury hotels such as the SLS Beverly Hills, nightclubs like Hyde, and restaurants like The Bazaar by Jose Andres, has also run into some trouble in recent years. One example of its troubles involved its gamble on the massive, 1,600-room SLS Las Vegas hotel and casino. The $415-million hotel, which opened in August 2014, lost more than $161 million in the first three quarters of 2015.

In October 2015, SBE CEO Nazarian sold his 10-percent stake in the SLS Las Vegas to his business partner working on the project, and SBE's agreement with the SLS Las Vegas changed from that of management to licensing.

This followed reports that Nazarian had been questioned by the Nevada Gaming Commission about his past drug use and business dealings. Eventually, the commission granted him a limited, one-year gaming license that prevented him from having direct involvement in running the casino.

In November 2015, Starwood signed the SLS Las Vegas to the company's soft brand collection, Tribute Portfolio, with plans to eventually convert one of the hotel's towers into the W Las Vegas this year. SBE continues to operate a licensing agreement with the hotel's owner.

Still, sources close to SBE say that SLS Las Vegas amounted to a one-off situation, and that SBE's pursuit of an asset-light, brand-driven hotel strategy should bode well for the company's acquisition of Morgans, and may also signal future sales of Morgans' three owned assets.

Shared Strengths

In a press release from SBE regarding the acquisition, Nazarian pointed to shared strengths among the Morgans Hotel Group and SBE Entertainment hospitality brands, as well as shared expertise, with Yucaipa's various real estate investments in such companies as Soho House and Sydell Group, the same company behind the NoMad Hotel in New York and the Line hotels in Los Angeles and Washington, D.C.

"I am thrilled that this transaction allows me to continue my relationship with both Jonathan Goldstein, who has become a valued partner, as well as my long-time friend and a titan in our industry, Ron Burkle, with Yucaipa's growing portfolio of world-class hospitality assets in Soho House, Sydell Group and Discovery Land Company. Our acquisition of Morgans will allow SBE to become a truly disruptive and value-add force across all platforms of hospitality, residential, entertainment, F&B [food and beverage], and development."

Nazarian also said, "SBE intends to invest significant funds to revitalize the three Morgans-owned properties, Delano, Hudson, and Clift."

Bjorn Hanson, a clinical professor at the NYU Tisch Center for Hospitality and Tourism, and a self-proclaimed "industry enthusiast," for one, sees the deal as a positive for both companies. "There's probably a bias in my thinking but I think this is a great acquisition which will be at a favorable price," Hanson said.

Hanson said that the brand awareness of Morgans Hotels Group's iconic brand portfolio is especially attractive for SBE. "Many people know the Mondrian name, and each of these Morgans hotels, in its own way, is its own brand. I don't know what Sam Nazarian is planning to do — there could be cities where there could be a Hudson, a Delano and a Mondrian all in one city. But I think they all have a loyal enough following from both guests and what these brands represented, at times, in the earlier life of the company."

He added he thinks it's likely we'll see more of Morgans' hotel brands appearing in future hotel properties in years to come. "It's just me speculating, but I think SBE, by buying these very valuable brand names, can seize on what they can generate in market presence and market performance."