Morgans and SBE walk away from proposed merger

In mid-2015, rumors began to circulate that Morgans Hotel Group was mulling over a possible merger with SBE Entertainment Group. However, news has surfaced that the proposed deal is no more.

According to The Wall Street Journal, talks between Morgans and SBE Group collapsed over disagreements regarding the terms of the deal. Private equity investor Ronald Burkle favored the merger, while Jason Kalishman, a Morgans board member, opposed the plan. Kalishman's investment firm, OTK Associates, is the largest shareholder in Morgans.

Burkle was in line to become the chairman of the combined company produced by the plan, and would have also acquired two Morgans hotels if it had gone through. Kalishman in turn wrote to the Morgans board to oppose the merger, and in addition some Morgans shareholders were apprehensive about giving board control to SBE. This eventually led to the deal folding after Burkle said he would not agree to a deal without full board approval.

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This decision comes one and a half months after New York-based real estate investment trust Rambleside Holdings extended an offer of $507 million for Morgans' final two properties, the Hudson in New York City and the Delano in Miami Beach. No further mention of this offer has been made, but the deal discussed between Morgans and SBE would have created an entity called SBE-Morgans, and would have seen Sam Nazarian, founder, chairman and CEO of SBE, head the company as CEO. Burkle, as part of the deal, would acquire two hotels valued at a combined $590 million. 

The failed merger could be damaging to SBE and Morgans, the latter of which hired Morgan Stanley to look into strategic alternatives for the company in 2014. According to NASDAQ, the company reported negative net income in recent quarters, despite the hospitality industry's recent boom. 

SBE could feel the sting of the missed deal through the loss of the option to publicly trade its stock, an strategy Nazarian was expected to use to grow his company, according to NASDAQ. 

In addition, the Reno Gazette-Journal reported that the Nevada Gaming Control Board recently recommended to allow Nazarian to sell his 10-percent stake in the SLS Las Vegas casino hotel, and withdrew his application for a gamboling license. The recommendation needs separate approval from the Gaming Commission. Nazarian says the plan to convert SBE's management contract to a licensing deal allowing the SLS name to be used no longer requires a gambling license. 

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