(B)(N) MHGC Morgans Hotel Group Company
Deal Book. The Morgans Hotel Group is under pressure to produce a profit (Reuters, June 13, 2013, Morgans Hotel board gains upper hand ahead of proxy vote).
Courtesy: Morgans Hotel Group
Annual revenues have steadily declined from $315 million in 2008 to the current $190 million and the losses are between ($60 million) and ($100 million) each year.
The company doesn’t pay a dividend and the key executives are earning $1 million to $2 million a year, and have a nice place to stay wherever they go, but with over 5,000 employees it’s more than just a family hotel.
Courtesy: Morgans on Madison Avenue, New York
How hard can it be to turn a profit when money is not (really) an issue and the guests hope to pay for a lot more than just a nice place to stay in Boston, New York, London (England), Marrakech (Morocco), and a half-dozen other places in the U.S.A.?
We think (just our opinion) that they ought to compete only with themselves for excellence, and not the much (ten-fold) larger Marriott International.
However, the battle for control has been going on for some time and the stock price is now up to $8 per share from $5 to $6 three months ago, and $4 early last year. Please see Exhibit 1 below.
There are a number of institutional holders of 5% to 10% of the stock who are staying gratis and enjoying the price ride, but the main agitation is coming from investor Michael Olshan and Alfred Taubman’s OTK Associates LLC which seems to have accumulated a position of about 14% of the stock since 2008 when the stock price collapsed from $15 to $20 to end the year at $4 (Bloomberg, March 5, 2008, Morgans Gains After Billionaire Taubman Buys Shares).
The market value, even at $8, is only $250 million, and what that buys is $600 million in assets,$750 million in debt, and a negative shareholders equity of ($150 million); the fixed assets are booked at $230 million (net) with an accumulated depreciation of $180 million. Companies such as PSA Public Storage (Nasdaq 100) are doing way better than that and have a current dividend yield in excess of 3%.
The price of risk is $5.50 and so values the company at $180 million but, we suppose, the selling group/takeover group thinks that they can get a lot more, maybe over time by running the hotel their way, or by selling or developing the properties.
Our estimate of the downside volatility in the stock price is minus ($2) per share so that it could be trading between the current $8 and $6 or $10 without surprise. But these are surprising times, and we’d think about the July put at $7.50 for $0.60 per share as an appropriate shelter for the upcoming board meeting on June 14th, tomorrow.
Exhibit 1: (B)(N) MHGC Morgans Hotel Group Company – Risk Price Chart
(B)(N) MHGC Morgans Hotel Group Company
Morgans Hotel Group Company operates, owns, acquires, develops and redevelops boutique hotels, primarily in gateway cities and select resort markets in the United States, Europe and other international locations, and nightclubs, restaurants.
(Please Click on the Chart to make it larger if required.)
From The Company: At Morgans Hotel Group, we are the global leader and innovator of the lifestyle hospitality sector, dedicated to building a differentiated brand portfolio and establishing our properties in 24 hour urban and select resort markets. We create a vibe that encourages our guests, who we call the Creative Class, to live every moment more intensely. Morgans Hotel Group is immersive, transformative and deeply engaging; embracing irony and style, elegance and luxury, with strong and daring vision. We bring together the creative power of many – designers, artists, musicians – to bend the rules, stretch the realm of possibility and constantly push the boundaries of what a hotel can be. We lead, where others follow. The company was incorporated in 2005, has 5,000 employees, and is based in New York, New York.
The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.
Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.
To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.
Postscript
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