SBE Entertainment buys boutique innovator Morgans Hotel Group

Hudson New York

The will-they/won't-they relationship between SBE Entertainment Group and Morgans Hotel Group has ended in a transaction, with SBE acquiring all of the outstanding shares of Morgans' common stock for $2.25 per share in cash.

The total equity value of Morgans is being placed at $82 million. In conjunction with the exchange of Morgans' Series A preferred securities, the assumption of debt and transfer of capitalized leases, the total enterprise value of the company is roughly $800 million on behalf of Morgans. This price represents a 69-percent premium over Morgans' unaffected closing price on May 5, 2016, and a 54-percent premium on Morgans' volume weighted average price for 30 days up to and including May 5, 2016.

Delano South Beach

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As another part of the deal, affiliates of The Yucaipa Companies will exchange $75 million in Series A preferred securities, accrued preferred dividends, and warrants for $75 million in preferred shares and an interest in the common equity in the acquirer and, following the closing, the leasehold interests in three restaurants in Las Vegas currently held by Morgans.

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Apart from the financials, SBE is acquiring Morgans' 13 owned, operated or licensed hotels in London, Los Angeles, New York, Miami, San Francisco, Las Vegas and Istanbul. SBE is working with lenders to assume the mortgages of the Hudson New York and Delano South Beach hotels, which are estimated at $422 million. SBE plans to assume the mortgages at the closing of the deal, which was approved by Morgans' board of directors and is expected to close in the third or fourth quarter of this year.

"Morgans’ board of directors carefully considered all of the alternatives available to us and we are pleased to have arrived at a transaction that we believe is in the best interests of our shareholders, while providing a great home for our attractive assets under a renowned hospitality company in SBE," Howard M. Lorber, chairman for Morgans, said in a statement.

The Wall Street Journal: High-end Morgans hotel chain dealt to hospitality company SBE for $82 m... @MarketWatch

SBE financed the transaction through a combination of proceeds from the sale of new preferred equity in the newly formed company to a third-party investor, liquidity from the refinancing of existing term loans and a new revolver. Morgan Stanley & Co. served as financial advisor and Fried, Frank, Harris, Shriver & Jacobson served as legal advisors to Morgans Hotel Group.

The Buyout that Almost Wasn't

The acquisition has its roots in 2013, when executives at Morgans hinted at their interest in a sale. It wasn't until August 2015 that SBE's founder and CEO, Sam Nazarian, made public his interest in buying the company. But the time wasn't right, and just three months later the transaction would be called off over disagreements between private equity investor Ronald Burkle and Jason Kalishman, a Morgans board member and its largest shareholder, regarding the terms of the deal.

At the time, New York-based real estate investment trust Rambleside Holdings offered $507 million for Morgans' Hudson New York and Delano South Beach hotels, an offer we know now to have been rebuffed.

Morgans Hotel Group was founded in 1984 by Ian Schrager and was at the forefront of the boutique hotel movement in that period. The company has since suffered somewhat in today's climate, where every major brand is also operating its own collection of boutique hotels.

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