When it was announced in May that Sam Nazarian’s privately owned SBE would finally succeed in its second attempt to buy the beleaguered Morgans Hotel Group, it wasn’t all that surprising.
SBE had tried, unsuccessfully, in 2015 to buy the company once led by legendary boutique hoteliers Ian Schrager and Steve Rubell, but failed because of in-fighting among members of Morgans’ board. SBE’s interest in Morgans was a given, and with the 2015 deal, the two companies would have merged with a 50/50 equity split, with Nazarian as the new CEO of the combined public entity, but it wasn’t meant to be.
What was surprising about the May 9 deal, however, was the price tag. Because Morgans’ stock price had dropped so low, to just 79 cents a share in February, SBE came back for Morgans, and for a much lower price of $2.25 per share, or just around $82 million, instead of a 50/50 merger as proposed in 2015. Together, the combined company, if the deal is approved by shareholders, will comprise 20 hotels, and the overall Morgans transaction, including debt, is worth an estimated $794 million.
We all knew Morgans Hotel Group, which had once been a leader in the boutique hotel movement, had been flailing. It had been without a permanent CEO since 2013, and interim CEO Jason Kalisman left in 2015 following a power struggle with fellow board member Ron Burkle. Last spring, Morgans lost its management contract for the Mondrian Soho in New York following the hotel’s sale to Alex Sapir following foreclosure; the property is now branded the NoMo SoHo.
But we didn’t necessarily know just how dire Morgans’ financial situation was until the company’s latest filings with the U.S. Securities and Exchange Commission on June 22. The company didn’t hold a first quarter earnings call this year, given the news of SBE’s acquisition proposal on May 9.
In these new filings, Morgans lays out the very long details of how it got to this point, why its board finally gave into SBE’s pursuit, and why its shareholders should seriously consider approving the acquisition proposal from SBE.
Bottom line? The company desperately needed to be bought.
Perhaps the most interesting information gleaned from the filings, however, comes in the form of two different financial analyses conducted by Morgan Stanley, Morgans Hotel Group’s long-time financial advisor. Morgan Stanley presented the first one to the Morgans board of directors on March 14, and the second on May 8, presenting a “fairness opinion” on SBE’s newest proposition to buy the company.
Here are just a few highlights:
- Morgans Hotel Group’s stock price had dropped a lot (about $4 a share) since the first SBE deal fell through, and it’s been priced between $1 and $1.50 for most of 2016.
- At the end of 2015, Morgans had $46 million in cash. At the end of March, it only had $11.9 million and by June 30, Morgan Stanley estimated it will have only $7.7 million.
- The company’s cash generation was expected to be negative in 2016/2017, impacting both current operations and the addition of new properties.
- It pointed out the lack of a permanent CEO since 2013.
- Because Morgans isn’t that big (the portfolio is currently only 13 hotels), it would have had trouble getting rid of its owned hotels and adopting an asset-light strategy like other big hotel companies (i.e. Marriott, Starwood, and Hilton, for example) have pursued.
- Other potential problems include: “negative press” and “potential for increased employee turnover.”
- In March, Morgan Stanley was already encouraging Morgans Hotel Group to collect termination fees by ending its management agreements with Shore Club, Mondrian South Beach, Royalton, and Morgans itself.
- Since 2008, the company has collected a net operating loss balance of $433 million as of Dec. 31, 2015.
- If the company remained as an independent standalone, its “near-term cash flows would be negative for several years.”
- Compared to its competitors like Belmond, Marriott, Hilton, and Starwood, Morgans’ stock price was demonstrably much lower.
- Morgans had been up for sale since the middle of 2014.
- If the latest deal between Morgans and SBE falls through, a termination fee of $6.5 million applies.
- Tough market conditions in New York City and Miami are only adding to the company’s financial woes.
So, what’s next? Morgans is currently soliciting its shareholders to get them to vote on the deal from SBE. A vote is set to take place at an as-yet undisclosed date and time.