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Morgans Hotel board gains upper hand ahead of proxy vote

By Bijoy Anandoth Koyitty

(Reuters) - A proxy battle for control of Morgans Hotel Group Co's board will be decided on Friday but the momentum seems to have swung in favor of the incumbent board after it said it would explore a sale of the company if re-elected.

OTK Associates, the hotel operator's largest shareholder with a 13.9 percent stake, has put up a seven-member director slate that it said would seek to return Morgans to profitability.

One investor, who was 'leaning towards' OTK, said he would now support the Morgans management in the vote due June 14.

"I would expect other shareholders also supporting the management, given the recent developments - a clear statement the management has made in terms of selling the company," said Sahm Adrangi, founder of Kerrisdale Capital Management.

The New York-based hedge fund holds more than a 1 percent stake in Morgans Hotel.

Morgans, known for boutique hotel brands including the Hudson and Royalton in New York, Delano in South Beach Miami and Mondrian in Los Angeles, said last week it was exploring a sale given shareholder feedback and expressions of interest it has received from potential buyers.

The company then said it had been contacted by five strategic buyers, which has since risen to nine.

Morgans said last month it had rejected two takeover bids from a large international hotel company since November. Morgans said the suitor, which it did not name, had offered $7.50 per share in cash.

The stock, which last traded at that level in October 2011, closed at $7.56 on Thursday.

"Given Morgans plans to sell, which they say are definitive, I think that Morgans will win out over OTK," said analyst William Marks of JMP Securities.

RETURN TO PROFITS

OTK, which rejected Morgans' offer of two board seats earlier, is jointly owned by families of investor Michael Olshan and Alfred Taubman, founder of luxury mall operator Taubman Centers Inc .

OTK built its case with a series of presentations and shareholder interactions, mainly targeting Morgans's failure to post a profit in the last six years.

Shares of Morgans have shed nearly three quarters of their value since the 2008-2009 downturn.

OTK argues that Morgans has continued to underperform even as rivals have managed turned profitable.

Shares of much larger rival Marriott International , which also lost some 75 percent of their value during the recession, have nearly bounced back to pre-recession levels.

OTK has said if it cannot return the company to profitability, it would "appropriately evaluate and pursue strategic alternatives in a disinterested fashion."

However, critics argue it may not be interested in a sale.

"OTK entered the company stock at an average cost of about $15.20 per share, raising questions about whether it would support a sale of the company below this price," Morgans Chief Executive Michael Gross said on a conference call last week.

Unite Here, a union representing hotel industry workers, said OTK did not support its proposal to end Morgans's poison pill plan, raising concerns that the investor would use similar anti-takeover protections in the future.

OTK did not respond to repeated requests for comment.

Morgans has also criticized OTK's slate for being too closely tied to the investor's founding families.

OTK's slate includes siblings, 30-year old Michael Olshan and 33-year old Andrea Olshan, and 34-year old Jason Taubman Kalisman, an existing Morgans board member and grandson of Alfred Taubman.

SPLIT VERDICT LIKELY

Two influential proxy advisory firms, Institutional Shareholder Services Inc (ISS) and Glass Lewis & Co, last week said they supported three of the OTK nominees, which suggests the shareholder voting may not be one-sided.

Both ISS and Glass Lewis support two common candidates - Jason Taubman Kalisman and Mahmood Khimji, president of Highgate Holdings Inc, a real estate investment company. Kalisman is part of both slates.

Unite Here, which owns a small stake in Morgans, may vote for a split board, its deputy director of research, Courtney Alexander, said.

The labor union is also worried about Morgans nominees with "conflicting interests," who could come in the way of a transaction that "most fairly values this company."

It was referring to three of six Morgans nominees having current or past affiliations with Yucaipa Companies, the hotel group's largest creditor.

BURKLE HOLDS KEY

Yucaipa, controlled by supermarket magnate Ron Burkle, has thrown its weight behind the current board. The investor owns about 27.9 percent of Morgans including warrants, but cannot exercise those rights ahead of the vote.

Morgans entered into a deal with Yucaipa in April, in which the investor agreed to cancel $230 million worth of convertible notes, preferred stock and warrants, in exchange for some Morgans assets. The deal included a $100 million rights offering that Yucaipa would backstop at no fee.

But after OTK opposed the plan, the Delaware Court of Chancery ruled in May that Morgans could not consummate that deal until the issue was properly discussed by the board.

Morgans and Yucaipa have since said the transaction has ceased to exist because of the litigation.

Yucaipa also said it would support Morgans's board in pursuing options, including a sale, but would not bid itself.

That support could be crucial, as Yucaipa holds consent rights on a sale of Morgans for as long as it holds warrants to purchase at least 6.25 million shares. The company currently holds warrants for double that number.

Analysts said a Morgans sale should command a premium and named large hotel groups such as Marriott and Starwood Hotels and Resorts Inc as potential acquirers.

(Editing by Anthony Kurian and Sriraj Kalluvila)

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