Morgans Hotel Group Co (MHGC)

[Enterprising Investor]

Potential hotel buyer backs out in fear of Ron Burkle (8/15/16)

By Josh Kosman

Ron Burkle can rest easier when it comes to Morgans Hotel Group.

A potential bidder for the boutique hotel chain — whose $3-a-share proposal for the business would have trumped a rival offer from a Burkle group — has backed down rather than risk a battle with the billionaire investor, The Post has learned.

The suitor fretted that Burkle, who holds veto power over significant Morgans asset sales, would prove to be a roadblock to any deal other than his own, said a source close to the situation.

“They are stepping back because life is too short,” the source said.

Burkle appears close to nabbing Morgans after a seven-year saga. The billionaire and Sam Nazarian’s SBE Entertainment Group have offered $2.25 a share for the hotel chain that includes the Hudson in Columbus Circle and the Delano South Beach.

Shareholders must vote on the deal, which values Morgans at around $800 million, by Sept. 14. As of last week, Morgans said stockholders representing 29 percent of its outstanding shares had voted for it.

Under the terms, Burkle’s Yucaipa Cos. will exchange $75 million in preferred securities, dividends and warrants for an equity stake in SBE, and leasehold interests in three Las Vegas restaurants held by Morgans.

Last month, Morgans disclosed that another bidder, which it identified only as “Bidder V,” had surfaced with a $2.75 per share offer to acquire the company. That Asia-based suitor made a non-binding bid and is still looking over the books, a source said.

Burkle, part owner of the NHL’s Pittsburgh Penguins, tried to buy the Ian Schrager-founded chain once before in 2015 but was blocked by Jason Kalisman, a Morgans board member and Taubman family real estate scion.

Burkle’s interest in the hotel operator dates back to 2009, when Yucaipa loaned $75 million to a desperate Morgans during the financial crisis.

Seven years later that deal still haunts the hotel chain. The dividend rate on Burkle’s preferreds is set to double, to 20 percent, on Oct. 18 — and the company has no means of repaying the loan.

That same deal also gave Burkle the right to block significant asset sales through warrants that can be exercised at $6 a share.

To remove Burkle’s veto power, a rival bidder could buy the debt securities for around $136 million after factoring in interest payments. But that still leaves the issue of the warrants, which can only be bought from Burkle if he’s willing to sell.

The suitor ready to offer roughly $3 a share for Morgans believed the argument could be made that Burkle’s warrants are so out of the money that he can’t exercise those veto rights, sources said. Morgans shares closed Friday at $2.28.

A Yucaipa spokesman said no suitor has contacted Burkle to see if he would exercise his warrant veto rights.

However, a source familiar with Burkle’s thinking said, “He believes his warrants carry their rights regardless of the stock price.”

Ultimately, the prospective suitor decided to walk rather than challenge Burkle.

A Morgans spokesman declined to comment.

http://nypost.com/2016/08/15/potential-hotel-buyer-backs-out-in-fear-of-ron-burkle/