Morgans Hotel Group Enters Transformative Deal With Yucaipa Companies

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NEW YORK, April 1, 2013 ( — Morgans Hotel Group Co., the New York-based hospitality management company, today announced that it has signed agreements with The Yucaipa Companies  to cancel Yucaipa’s interests in the Company’s convertible notes, preferred stock and stock warrants in exchange for the Company’s ownership interests in Delano South Beach and The Light Group. This marks the culmination of a 15-month exploration process by a Special Committee of the Board to review strategic alternatives.

The Company will continue to operate Delano South Beach pursuant to a long-term management agreement. In addition, the agreements provide that the Company will launch a $100 million rights offering available to all Morgans’ shareholders, which Yucaipa will 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 million of debt maturing in 2014. In addition, after retiring the credit facility secured by Delano South Beach, which currently has $35 million of outstanding obligations, the Company projects it will have $65 million of 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,” said Michael 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 at Hudson we 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 of Hudson’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 million in promissory notes) to Yucaipa in exchange for the cancellation of the following securities held by Yucaipa:

  • $88 million principal 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 $6.00 per share until April 2017.

In addition, Morgans will also receive $6.5 million in cash for the Company’s leasehold interests in three restaurants at Mandalay Bay, Las Vegas that will be operated by The Light Group, and Yucaipa will 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 million rights offering available pro-rata to all the Company’s shareholders at $6 per share. To ensure that the Company raises the full $100 million target, Yucaipa has 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 by Delano South Beach that currently has $25 million of outstanding borrowing and a $10 million letter of credit drawn. The remaining $65 million of 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 in December 2011 to evaluate, negotiate and recommend to the Board various deleveraging and other strategic alternatives, including a possible transaction with Yucaipa. 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 with Yucaipa on what we believe to be a very good transaction for the company and its stockholders,” said Michael 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 with Yucaipa. 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 to Yucaipa.

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