Morgans Hotel — Proxy Contest (April 2014)
45 slides from Morgans Hotel's proxy contest presentation, Apr 22, 2014
Slide 1: Presentation to ISS
Morgans Hotel Group Co. (Nasdaq: MHGC) Presentation to ISS April 21 2014 Kerrisdale Capital Management, LLC 1212 Avenue of the Americas, 3rd Floor New York, NY 10036 Tel: 212.792.7999 Fax: 212.531.6153 Email: [email protected] CONFIDENTIAL INVESTOR PRESENTATION
Slide 2: Background – Morgans Hotel Group Co. (MHGC)
Background – Morgans Hotel Group Co. (MHGC) March 2013: OTK Associates (“OTK”) (13.91% shareholder) disclosed intent to nominate directors April 2013: MHGC (“Morgans” or the “Company”) announced a $100 million rights offering in connection with transaction announced with the Yucaipa Companies; M
Slide 3: Why Change is Needed
Why Change is Needed Anything OTK can do, we believe a strategic acquirer can do better In every critical factor needed for MHGC’s success, whether it be capital, people or locations, global hotel operators can execute MHGC’s plan faster, cheaper and with less risk Since OTK has taken control
Slide 4: Why Change is Needed (cont’d)
Why Change is Needed (cont’d) We believe that MHGC is worth far more in the hands of a strategic acquirer than as a standalone entity A global operator has the balance sheet flexibility to quickly scale the platform Loyalty programs from an operator like Hyatt or Starwood could deliver far mor
Slide 5: Why Change is Needed (cont’d)
Why Change is Needed (cont’d) After 10 months, OTK has yet to appoint a permanent CEO to run the business and the executives responsible for growth are gone Despite having no operating experience, Jason Kalisman was named as CEO Morgans has managed to sign only one net operating contract in th
Slide 6: Why Change is Needed (cont’d)
Why Change is Needed (cont’d) Our nominees have years of M&A and valuation experience; we will run a robust auction and capture synergy values for shareholders We believe shareholder value maximization requires an immediate sale process. Our nominees, including Andrew Broad, Jordon Giancoli and
Slide 7: OTK’s Board Nominees have Failed to Perform
OTK’s Board Nominees have Failed to Perform CONFIDENTIAL INVESTOR PRESENTATION
Slide 8: MHGC Continues to Underperform Peers Since OTK Assumed Control
MHGC Continues to Underperform Peers Since OTK Assumed Control Substantial underperformance since OTK took control Source: CapitalIQ OTK continues down a path of a standalone strategy, which will not work Page 7
Slide 9: As a Standalone Business, MHGC has Continually Underperformed
As a Standalone Business, MHGC has Continually Underperformed Long-term underperformance given structural weaknesses Source: CapitalIQ As a standalone business model, MHGC is undercapitalized, inefficient and lacks the global infrastructure to maximize its value Page 8
Slide 10: Simply Put, OTK’s Strategy is Flawed
Simply Put, OTK’s Strategy is Flawed Despite claims of “deep industry relationships” and receiving “numerous inbound expressions of interest,” the current management team has signed only one new management contract ─ for a 78-room hotel What MHGC has accomplished in a year, global hotel operator
Slide 11: OTK has Failed to Hire an Experienced Management Team
OTK has Failed to Hire an Experienced Management Team The current board assumed control nearly 10 months ago, and yet there is still no permanent CEO The board has failed to provide any update on the CEO search process Jason Kalisman, the interim CEO and a founding member of OTK Associates, ha
Slide 12: Failure to Unlock Value by Selling Owned Assets at Market Value
Failure to Unlock Value by Selling Owned Assets at Market Value During last year’s proxy contest, OTK stated that MHGC can generate an additional $385m by selling Morgans’ most valuable assets at market value The board has yet to inform shareholders about the timing of the sale process. Given th
Slide 13: Balance Sheet Issues Remain a Concern
Balance Sheet Issues Remain a Concern Failure to appoint Yucaipa Investors’ nominee to the board after the 2013 shareholder meeting has resulted in a 4% increase in dividend rate on Series A preferred securities The current board chose to retire $88m of Yucaipa’s inexpensive 2.375% interest rate
Slide 14: Unfulfilled Promises Have Exacerbated Execution Risk
Unfulfilled Promises Have Exacerbated Execution Risk Reality Source: OTK Associates investor presentation for 2013 proxy contest dated 5/28/2013 Page 13
Slide 15: Selling to a Strategic Buyer is a Better Option
Selling to a Strategic Buyer is a Better Option CONFIDENTIAL INVESTOR PRESENTATION
Slide 16: Why Sale to a Strategic Buyer Makes Sense
Why Sale to a Strategic Buyer Makes Sense Needs MHGC Standalone Global operators Capital MHGC has a very high cost of capital, its lack of Global operators have billions in capital, and financing restricts and slows growth, its debt can finance MHGC’s growth plans faster, burden creates enormous fin
Slide 17: MHGC as a Standalone Business is Inferior in Every Respect
MHGC as a Standalone Business is Inferior in Every Respect MHGC MAR HOT H IHG CHH Capital Mkt Cap $265 $16,500 $15,000 $8,400 $8,200 $2,600 Revenue $236 $2,500 $3,500 $2,500 $1,900 $720 Debt / TEV 85% 15% 10% 15% 14% 25% People + Hotels Employees 4,400 123,000 181,000 45,000 8,200 1,100 Properties 1
Slide 18: Current Share Price is Supported by Expectation of a Transaction…
Current Share Price is Supported by Expectation of a Transaction… MHGC Closing Share Price $9.00 OTK nominees gain Board control (6/14/2013) $8.00 $7.00 OTK sent nomination MHGC receives $8.00/share letter to the board offer from Yucaipa (3/18/2013) $7.50/share (11/1/2013) offer $6.00 disclosed (5/1
Slide 19: …Such Expectation is Evident in MHGC’s Trading Multiple
…Such Expectation is Evident in MHGC’s Trading Multiple EV/LTM EBITDA EV/2014 EBITDA(1) 23.0x Morgans Hotel 15.8x 21.0x 20.6x Choice Hotels 15.5x Hyatt Hotels 12.3x Marriott 13.9x 19.0x Starwood Hotels 13.1x 17.4x Wyndham 11.2x 17.0x 15.8x 15.7x Peer Median 13.1x 15.0x 13.2x 13.0x 11.7x 11.0x 9.0x 7
Slide 20: Performance Does Not Support Valuation – ROIC
Performance Does Not Support Valuation – ROIC FY13 Return on Invested Capital (%) 50.0 42.1 40.0 36.1 30.0 20.0 11.7 10.0 7.1 3.4 0.0 -10.0 -11.5 -20.0 Marriott Choice Hotels Starwood Hotels Wyndham Hyatt Hotels Morgans Hotel International Worldwide Source: FactSet Page 19
Slide 21: A Sale Eliminates Execution Risk
A Sale Eliminates Execution Risk Recent execution missteps highlight how difficult it is for MHGC to execute on its growth strategy Failed hotel expansions Delano Marrakech: hotel contract was terminated in less than a year $8 million cash flow guarantee now in legal arbitration Las Vegas
Slide 22: A Sale Eliminates Financial Risks
A Sale Eliminates Financial Risks In addition to an enormous debt burden, MHGC has off-balance-sheet commitments that create a great deal of financial and executional risk 2014: MHGC has ~$130 million of debt + interest due in 2014 2014 – 2016: MHGC must be prepared to fund sizable off-balance
Slide 23: MHGC is Nowhere Close to Achieving Plan
MHGC is Nowhere Close to Achieving Plan Since OTK took over MHGC, the business has added one hotel contract (Morgans Istanbul) and has lost two contracts (Delano Marrakech, Hudson London) We estimate that MHGC’s potential fee income (including all announced signed hotels) is only $43 to $48 mill
Slide 24: FY13 EBITDA Growth Largely Driven by Legacy Board Decisions
FY13 EBITDA Growth Largely Driven by Legacy Board Decisions Contribution Analysis (Total Hotel and F&B EBITDA) 60.0 Las Vegas lease Increase in Hudson agreements signed by EBITDA following prior mgmt. team renovation in $2.5 $50.0 50.0 2011/2012. Undertaken by prior mgmt team $2.6 $2.6 $9.9 40.0 $32
Slide 25: Standalone Value is Substantially Less Than a Potential Sale Price
Standalone Value is Substantially Less Than a Potential Sale Price When accounting for the considerable financial and operating risk of owning an undercapitalized company, we have little doubt that a current sale process is a far more attractive proposition A sale process will yield a far higher v
Slide 26: Value for Strategic Buyer: Cost Synergies
Value for Strategic Buyer: Cost Synergies OTK might argue that by selling now, shareholders will not receive credit for future growth MHGC’s entire growth pipeline, which entails enormous execution risk, is basically equivalent to the cost cuts a strategic acquirer can achieve today Strategic
Slide 27: MHGC Has Potential for Significant Cost Synergies
MHGC Has Potential for Significant Cost Synergies SG&A Expense % of Revenue 40.0% 37.0% 35.0% 30.0% 25.0% 20.0% 15.7% 15.0% 14.4% 10.0% 7.7% 6.2% 5.5% 5.0% 0.0% Morgans Hotel Choice Hotel Wyndham Hyatt Hotels Starwood Hotels Marrriott Worldwide International Source: FactSet Operational improvements
Slide 28: MHGC Assets have Strategic Importance
MHGC Assets have Strategic Importance Global hotel operators are aggressively looking to expand their luxury / lifestyle offerings and MHGC’s brands will be highly sought after Starwood’s expansion of the W and Le Meridien brands are a perfect illustration of how a strategic acquirer can do far
Slide 29: OTK Standalone Strategy vs. Kerrisdale’s Sale Strategy
OTK Standalone Strategy vs. Kerrisdale’s Sale Strategy Strategy OTK Standalone Kerrisdale Sale Growth - OTK wants to grow MHGC organically Global operators have hotels around the world, - In the past year, OTK has managed to sign local managerial talent, and can achieve far only one net contract mor
Slide 30: Today’s Favorable Sale Conditions May Not Persist
Today’s Favorable Sale Conditions May Not Persist MHGC today benefits from the perfect conditions for a sale Interest rates: low rate environment is very supportive for real estate transactions: the Hudson and Delano hotels can attain peak prices Strategic company valuation: Strategic companie
Slide 31: Governance Concerns
Governance Concerns CONFIDENTIAL INVESTOR PRESENTATION
Slide 32: MHGC Board is not Truly Independent
MHGC Board is not Truly Independent Four of the nine nominees are closely affiliated with OTK and the families that control OTK, namely, Taubman and Olshan Two are young Olshan family members, one is an employee of an Olshan family business, one is a young Taubman family member Source: Morgans H
Slide 33: Corporate Governance Concerns
Corporate Governance Concerns Almost 10 months after gaining control, the board has yet to disclose details of the CEO search process The board has allowed Mr. Kalisman to operate as interim CEO, despite his lack of hospitality industry experience The current nominees could have expanded the B
Slide 34: MHGC Manipulated the Corporate Machinery
MHGC Manipulated the Corporate Machinery Unilaterally Increased Size of the Board Just 40 Days Prior to Annual Meeting & After Record Date Board increased from 7 to 9 members more than 3 weeks after Kerrisdale nominated what it believed to be a full slate of 7 director candidates MHGC knew Kerri
Slide 35: Agreement with Jonathan Langer Raises Additional Independence Concerns
Agreement with Jonathan Langer ̶ Raises Add’t Independence Concerns On February 9, 2014, the Company entered into a one-year consulting agreement with Jonathan Langer, a member of the Company’s board. Under the terms of the consulting agreement, Mr. Langer will provide services to the Company in c
Slide 36: Our Plan and Nominee Background
Our Plan and Nominee Background CONFIDENTIAL INVESTOR PRESENTATION
Slide 37: Our Nominees Have Relevant Experience
Our Nominees Have Relevant Experience M&A experience We believe shareholder value maximization requires an immediate sale process. Our nominees, including Andrew Broad, Jordon Giancoli and Navi Hehar have years of direct investment banking and transaction experience needed to ensure that MHGC ru
Slide 38: Why We are Confident About a Successful Sale Process
Why We are Confident About a Successful Sale Process Based on our experience, MHGC will undergo a very aggressive auction process which should yield significant synergy value for MHGC shareholders Multiple bidders: There are numerous well-capitalized, publicly traded global hotel operators that
Slide 39: Our First Steps
Our First Steps If elected our nominees would immediately initiate the following workstreams: Retain investment banker to initiate a full and transparent public sale process Engage Andrew Zobler as an advisor. Andrew Zobler is the CEO of the Sydell Group, which spearheaded and manages the Noma
Slide 40: Our Nominees
Our Nominees Sahm Adrangi Mr. Adrangi is the portfolio manager of Kerrisdale Capital Management Previously he was an investment analyst at Longacre Fund Management, LLC, a distressed debt credit fund (“Longacre”), from April 2007 to February 2009. Prior to Longacre, Mr. Adrangi worked in the b
Slide 41: Our Nominees (cont’d)
Our Nominees (cont’d) Andrew Broad Mr. Broad is a veteran of the hospitality industry with 15+ years of experience in hotel brokerage, third party hotel management, and brand development. He has been the principal hotel broker for over 150 hotel transactions throughout the United States In the
Slide 42: Our Nominees (cont’d)
Our Nominees (cont’d) Jordon Giancoli Mr. Giancoli is a principal and director of research at Kerrisdale Capital Management Prior to joining Kerrisdale he was an associate at Ondra Partners, a London-based M&A and strategic advisory firm and an analyst at the Mergers & Acquisitions group at HS
Slide 43: Our Nominees (cont’d)
Our Nominees (cont’d) L. Spencer Wells Mr. Wells is a partner at Drivetrain Advisors Previously, he served as a partner with TPG Special Situations Partners (“TSSP”) with joint responsibility for a multi-billion dollar portfolio of distressed credit investments. Prior to joining TSSP, Mr. Well
Slide 44: Conclusion
Conclusion Standalone strategy could face execution risks and diminished time value of money The board/management has failed to fulfill its promises from last year’s proxy contest MHGC’s high operating costs, unconventional capital structure, and absence of an experienced management team poses
Slide 45: Disclaimer
Disclaimer As of the publication date of this report, Kerrisdale Capital Management LLC, and its affiliates (collectively "Kerrisdale"), others that contributed research to this report and others that we have shared our research with (collectively, the “Authors”) have long positions in and own optio