Morgans Hotel Group Co. (MHGC)’s largest shareholder called a swap for a Florida hotel and a $100 million rights offering “insider dealings” that would benefit board member Ron Burkle’s investment firm.
The agreement with Burkle’s Yucaipa Cos., which would acquire the Delano South Beach in exchange for interests in Morgans’s convertible notes and preferred stock, follows a 15- month strategic review by a special committee of the board, the New York-based hotelier said yesterday.
The shareholder, OTK Associates LLC, “questions whether the board’s special committee has appropriately considered, in earnest, alternatives to consummating yet another ill-timed transaction with an interested party, especially given that two of Morgans’s directors have a significant financial interest in the transaction,” according to a statement today.
OTK Associates said last month it was seeking to overhaul Morgans’s board, aiming to return the company to profitability or have it pursue strategic alternatives. Morgans, which put the Delano South Beach on the market last year, has been selling real estate and using the proceeds to expand its management operations.
Jason Taubman Kalisman, a Morgans director and a founding member of OTK Associates, sued the company yesterday, seeking to block the planned “recapitalization” until the case is heard before a Delaware judge. Yucaipa was also named in the lawsuit, which was sealed except for a cover sheet with a brief description of the claim.
The rights offering would allow Yucaipa “to amass a significant voting equity position” because existing shareholders are “unlikely to want to invest in the policies of the existing management and board,” OTK Associates said.
Lex Suvanto, a spokesman for Morgans at the Abernathy MacGregor Group, declined to comment on the statement.
Whether Yucaipa gains or loses board seats would depend on the outcome of the rights offering. Under the deal with Morgans, the firm would backstop the offering with no fees if the rights aren’t exercised in full.
The transactions were negotiated through a special committee of independent directors because Yucaipa is a creditor with board representation, Morgans Chief Executive Officer Michael Gross said yesterday on a conference call with analysts. The company also retained its own independent financial and legal advisers “to ensure we receive fair value for our assets,” he said.
Morgans said it will continue to manage the Delano South Beach, in Miami Beach, under a long-term agreement. The transactions would reduce the hotelier’s debt and preferred stock obligations by $230 million, including the elimination of $113 million of debt maturing in 2014, Morgans said.
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