Exclusive: Morgans picks board member as CEO: source

NEW YORK Fri Mar 18, 2011 11:51am EDT

NEW YORK (Reuters) - Morgans Hotel Group (MHGC.O) will name board member Michael Gross, an executive of major shareholder Yucaipa, as its new CEO and appoint Marriott International MAR.N executives to run operations and development, said a person with firsthand knowledge of the plan.

Morgans, the original boutique hotel company and owner of such celebrity haunts as the Delano South Beach, has been under pressure from activist investors. But the appointments signal it might try to grow as an independent company rather than sell itself, said Jefferies analyst David Katz.

Shares of Morgans were up 4 percent to $8.78 in midday trading.

Dan Flannery, who currently runs Marriott's boutique-style Edition brand, will head operations at Morgans, the source said.

Morgans' new head of development will be Yoav Gery, who leads development of full-service hotels in North America for Marriott, according to the source, who is not authorized to speak to the media.

Gross was 34 years old as of Morgans' proxy filed last April.

Yucaipa, an investment company headed by billionaire Ron Burkle, presently owns 11 percent of Morgans' common equity and a $75 million preferred security investment in the company, according to Katz.

Fred Kleisner, whom Gross succeeds, is an interim chief executive officer who took over in September 2007 after previous CEO Ed Scheetz resigned by mutual agreement with the company.

David Hamamoto will remain Morgans' chairman, said the source.

UNDER PRESSURE

Morgans is struggling under a debt load of $660 million, about 2.5 times its market capitalization.

In November, Parag Vora of HG Vora Capital Management reported a 9.94 percent stake and said the investment firm wanted to "discuss alternatives."

Yet Morgans had significant debt back in 2006 when the company, founded by boutique hotel inventor Ian Schrager, went public. Even then, the plan was to pay down the debt and grow from there.

Five years later, the Morgans-brand portfolio is still small -- only 12 hotels as of December 31. Now the stock trades below $9, down from $20 at the close of its first day of trading.

The amount of debt and plunge in the share price has made the company a possible acquisition target. It has responded by talking up its intention to sell some real estate, emulating a business model common among larger rivals such as Marriott and Starwood Hotels & Resorts (HOT.N).

They prefer to minimize their risk by generating revenue from franchise and management fees rather than owning hotels.

Morgans says it might cut its debt load with the proceeds from asset sales and open new income streams by franchising its brands and managing properties owned by others.

Reuters has reported that Morgans was shopping at least three hotels and that second-round bids on two of them, in New York City, were due in late February.

The company has said it has signed management agreements for development projects in Cabo San Lucas, Mexico; on the Aegean Sea in Turkey; in the Highline area in New York City; and in Doha, Qatar, but has not found financing for some of them.

Neither Morgans nor Marriott could be reached for comment.

(Reporting by Abhishek Takle and Helen Chernikoff; Editing by John Wallace, Steve Orlofsky and Lisa Von Ahn)