| June 13
June 13 A proxy battle for control of Morgans
Hotel Group Co's board will be decided on Friday but
the momentum seems to have swung in favor of the incumbent board
after it said it would explore a sale of the company if
OTK Associates, the hotel operator's largest shareholder
with a 13.9 percent stake, has put up a seven-member director
slate that it said would seek to return Morgans to
One investor, who was 'leaning towards' OTK, said he would
now support the Morgans management in the vote due June 14.
"I would expect other shareholders also supporting the
management, given the recent developments - a clear statement
the management has made in terms of selling the company," said
Sahm Adrangi, founder of Kerrisdale Capital Management.
The New York-based hedge fund holds more than a 1 percent
stake in Morgans Hotel.
Morgans, known for boutique hotel brands including the
Hudson and Royalton in New York, Delano in South Beach Miami and
Mondrian in Los Angeles, said last week it was exploring a sale
given shareholder feedback and expressions of interest it has
received from potential buyers.
The company then said it had been contacted by five
strategic buyers, which has since risen to nine.
Morgans said last month it had rejected two takeover bids
from a large international hotel company since November. Morgans
said the suitor, which it did not name, had offered $7.50 per
share in cash.
The stock, which last traded at that level in October 2011,
closed at $7.56 on Thursday.
"Given Morgans plans to sell, which they say are definitive,
I think that Morgans will win out over OTK," said analyst
William Marks of JMP Securities.
RETURN TO PROFITS
OTK, which rejected Morgans' offer of two board seats
earlier, is jointly owned by families of investor Michael Olshan
and Alfred Taubman, founder of luxury mall operator Taubman
OTK built its case with a series of presentations and
shareholder interactions, mainly targeting Morgans's failure to
post a profit in the last six years.
Shares of Morgans have shed nearly three quarters of their
value since the 2008-2009 downturn.
OTK argues that Morgans has continued to underperform even
as rivals have managed turned profitable.
Shares of much larger rival Marriott International,
which also lost some 75 percent of their value during the
recession, have nearly bounced back to pre-recession levels.
OTK has said if it cannot return the company to
profitability, it would "appropriately evaluate and pursue
strategic alternatives in a disinterested fashion."
However, critics argue it may not be interested in a sale.
"OTK entered the company stock at an average cost of about
$15.20 per share, raising questions about whether it would
support a sale of the company below this price," Morgans Chief
Executive Michael Gross said on a conference call last week.
Unite Here, a union representing hotel industry workers,
said OTK did not support its proposal to end Morgans's poison
pill plan, raising concerns that the investor would use similar
anti-takeover protections in the future.
OTK did not respond to repeated requests for comment.
Morgans has also criticized OTK's slate for being too
closely tied to the investor's founding families.
OTK's slate includes siblings, 30-year old Michael Olshan
and 33-year old Andrea Olshan, and 34-year old Jason Taubman
Kalisman, an existing Morgans board member and grandson of
SPLIT VERDICT LIKELY
Two influential proxy advisory firms, Institutional
Shareholder Services Inc (ISS) and Glass Lewis & Co, last week
said they supported three of the OTK nominees, which suggests
the shareholder voting may not be one-sided.
Both ISS and Glass Lewis support two common candidates -
Jason Taubman Kalisman and Mahmood Khimji, president of Highgate
Holdings Inc, a real estate investment company. Kalisman is part
of both slates.
Unite Here, which owns a small stake in Morgans, may vote
for a split board, its deputy director of research, Courtney
The labor union is also worried about Morgans nominees with
"conflicting interests," who could come in the way of a
transaction that "most fairly values this company."
It was referring to three of six Morgans nominees having
current or past affiliations with Yucaipa Companies, the hotel
group's largest creditor.
BURKLE HOLDS KEY
Yucaipa, controlled by supermarket magnate Ron Burkle, has
thrown its weight behind the current board. The investor owns
about 27.9 percent of Morgans including warrants, but cannot
exercise those rights ahead of the vote.
Morgans entered into a deal with Yucaipa in April, in which
the investor agreed to cancel $230 million worth of convertible
notes, preferred stock and warrants, in exchange for some
Morgans assets. The deal included a $100 million rights offering
that Yucaipa would backstop at no fee.
But after OTK opposed the plan, the Delaware Court of
Chancery ruled in May that Morgans could not consummate that
deal until the issue was properly discussed by the board.
Morgans and Yucaipa have since said the transaction has
ceased to exist because of the litigation.
Yucaipa also said it would support Morgans's board in
pursuing options, including a sale, but would not bid itself.
That support could be crucial, as Yucaipa holds consent
rights on a sale of Morgans for as long as it holds warrants to
purchase at least 6.25 million shares. The company currently
holds warrants for double that number.
Analysts said a Morgans sale should command a premium and
named large hotel groups such as Marriott and Starwood Hotels
and Resorts Inc as potential acquirers.