Morgans Hotel Group Enters Transformative Deal With Yucaipa Companies To Reduce Debt And Preferred Stock By $230 Million
- Culmination of 15-Month Strategic Review Process
- Significantly Reduces Debt and Near-Term Maturities
- Rights Offering to Raise $100 Million
- Company Announces New Annual Meeting Date
The Company will continue to operateDelano South Beachpursuant to a long-term management agreement. In addition, the agreements provide that the Company will launch a$100 millionrights offering available to all Morgans' shareholders, whichYucaipawill backstop at no-fee should the rights not be exercised in full. The combined transactions will reduce Morgans' debt and preferred stock obligations by$230 million, which includes the elimination of$113 millionof debt maturing in 2014. In addition, after retiring the credit facility secured byDelano South Beach, which currently has$35 millionof outstanding obligations, the Company projects it will have$65 millionof cash remaining from the rights offering.
"This is a transformative deal that will significantly improve our financial position and accelerate the strategic development of our business," saidMichael Gross, CEO of Morgans. "The asset swaps and rights offering will dramatically strengthen our balance sheet, significantly reduce our debt obligations and risk profile, and also eliminate significant near-term maturities. In addition, the cancellation of the preferred stock and warrants will result in a simplified and more flexible capital structure for our shareholders."
Mr. Gross also noted: "We are announcing this important deal in the context of strong momentum in our business. We expect first quarter System-Wide Comparable RevPAR to be up 16% to 18%, which is the highest rate of growth since the first quarter of 2007, and atHudsonwe expect room revenue to be up around 40%. We are also seeing increased interest from development partners in our target regions and expect to announce new management and branding agreements in the coming months. With the recent opening of Delano Marrakech, the completion ofHudson's room renovations and eight new hotels projected to open in the next three years, we are excited about our ability to expand our business and increase shareholder value."
Under the agreements, Morgans will transfer its ownership interests in Delano South Beach and The Light Group (including its obligations under$18 millionin promissory notes) toYucaipain exchange for the cancellation of the following securities held byYucaipa:
- $88 millionprincipal amount of the Company's 2.375% Senior Subordinated Convertible Notes due 2014;
- 75,000 shares of the Company's Series A Preferred Securities, with an accumulated preference amount of$99 million; and
- Warrants to acquire 12.5 million shares of the Company's common stock at$6.00per share untilApril 2017.
In addition, Morgans will also receive$6.5 millionin cash for the Company's leasehold interests in three restaurants at Mandalay Bay,Las Vegasthat will be operated by The Light Group, andYucaipawill pay the remaining note obligations of the Company with respect to the acquisition of such leaseholds. Morgans will retain its long-term agreement with MGM Resorts International to convert THEhotel to Delano Las Vegas.
The agreements also provide that the Company will launch a$100 millionrights offering available pro-rata to all the Company's shareholders at$6per share. To ensure that the Company raises the full$100 milliontarget,Yucaipahas agreed to fully backstop the rights offering, with no fee, should the rights not be exercised in full.
Proceeds of the rights offering will be used to retire the Company's credit facility secured byDelano South Beachthat currently has$25 millionof outstanding borrowing and a$10 millionletter of credit drawn. The remaining$65 millionof cash will be available for general corporate purposes and investment in new hotel contracts.
Subject to the satisfaction of customary closing conditions, the transaction is expected to be consummated in the second quarter of 2013. A shareholder vote is not required to approve any of the combined transactions.
The transaction was negotiated by a Special Transaction Committee of the Board consisting of independent, disinterested directors, and approved by the Special Committee, as well as by a majority of the disinterested members of Board of Directors. The Special Committee was formed inDecember 2011to evaluate, negotiate and recommend to the Board various deleveraging and other strategic alternatives, including a possible transaction withYucaipa. The Board and the Special Committee determined that the transaction was in the best interests of the Company and its stockholders following a 15-month exploration process by the Special Committee, which included the exploration of the sale of Delano South Beach, the sale of the Company and other strategic alternatives.
"After considering various alternatives for over a year, we are pleased to have been able to reach agreement withYucaipaon what we believe to be a very good transaction for the company and its stockholders," saidMichael Malone, co-chairman of the Special Committee. "This transaction, combined with the rights offering, allows the Company to make significant progress on its goals of deleveraging and raising capital, thus providing the Company with much greater flexibility to execute its growth plan and expand its brand and management business globally, and does so with no inherent dilution to current stockholders."
Greenhill & Co., LLC served as independent financial advisor to the Special Committee and rendered a fairness opinion regarding the transaction withYucaipa. Richards, Layton and Finger, P.A. served as independent legal advisor to the Special Committee. Hogan Lovells US LLP and Sullivan & Cromwell LLP served as legal advisors to the Company. Moelis & Co. served as financial advisor and Munger, Tolles & Olson LLP served as legal advisor toYucaipa.
Morgans will host a conference call to discuss these events onApril 1at9.00 am Eastern Time.
The call will be webcast live over the Internet and can be accessed at www.morganshotelgroup.com under the About Us, Investor Overview section. Participants should follow the instructions provided on the website for the download and installation of audio applications necessary to join the webcast.
The call can also be accessed live over the phone by dialing (888) 802-8577 or (973) 935-8754 for international callers; the conference ID is 31275951. A replay of the call will be available two hours after the call and can be accessed by dialing (800) 585-8367 or (404) 537-3406 for international callers; the conference ID is 31275951. The replay will be available fromApril 1, 2013throughApril 8, 2013.
New 2013 Annual Meeting Date and Record Date
In connection with the contemplated rights offering, the Board determined that it is in the best interests of the Company and its stockholders to postpone its 2013 Annual Meeting of Stockholders originally scheduled forMay 15, 2013 toJuly 10, 2013, and to establish a new record date for the annual meeting ofMay 29, 2013in order to allow the holders of the Company's common stock following the rights offering to vote their shares of common stock (including those shares acquired in the rights offering) on the matters to be presented at the annual meeting, including the election of directors for the next year or until their successors are duly elected and qualified. The 2013 Annual Meeting of Stockholders will be held atHudsoninNew York CityonFriday, July 10, 2013at10:00 AM Eastern Time.
Additional Information and Where to Find It
The Company will be filing a proxy statement and WHITEproxy card with the Securities and Exchange Commission (the "SEC") in connection with the solicitation of proxies for its 2013 Annual Meeting of Stockholders. Stockholders are strongly advised to read the Company's 2013 proxy statement when it becomes available, because it will contain important information. Stockholders may obtain a free copy of the 2013 proxy statement and other documents that the Company files with the SEC (when available) from the SEC's website at www.sec.gov or the Company's website at www.morganshotelgroup.com.
The Company, its directors and its executive officers may be deemed participants in the solicitation of proxies from stockholders in connection with the Company's 2013 Annual Meeting of Stockholders. Information regarding the persons who may, under the applicable rules and regulations of the SEC, be considered participants in the solicitation of stockholders in connection with the Company's 2013 Annual Meeting of Stockholders, and their direct or indirect interests, by security holdings or otherwise, which may be different from those of the Company's stockholders generally, will be set forth in the 2013 proxy statement and the other relevant documents to be filed with the SEC. Information concerning the Company's directors and executive officers is available in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2012, which was filed with the SEC onMarch 6, 2013, and the Company's definitive proxy statement for the 2012 annual meeting of stockholders, which was filed with the SEC onApril 16, 2012.