Morgans Hotel Group Co. (MHGC) recently penned a definitive agreement to buy the 90% controlling interest in The Light Group (“TLG”), a leading lifestyle food and beverage company, for $46.5 million. The purchase price has been divided into two tranches of a cash consideration worth $28.5 million and the remaining $18.0 million payable after EBITDA achievement of the same amount from Light Group's existing business over the next 27 months.
The transaction is expected to be sealed in the fourth quarter of 2011 and is believed to be immediately accretive to Morgans’ earnings as TLG is stepping into the Morgans family with approximately $7.7 million in adjusted annual EBITDA. Post acquisition, the founder and chairman of TLG will continue to play a pivotal managerial role.
The Light Group boasts of a ten-year track record in serving foods and beverages at the world’s top properties. Its strong association with MGM Resorts International (MGM) will allow Morgans Hotel to work on the consequent strategic partnerships, post acquisition.
Morgans Hotel has always focused on the food and beverage arena which has been an underperformer in the recent quarters as opposed to the historic levels. Hence, the company remains in search of lucrative acquisitions to turn the segment around. In June 2011, Morgans Hotel acquired the remaining 50% interests that it does not already own in its food and beverage joint venture with China Grill Management.
Thus, we believe the recent TLG deal is in sync with Morgans Hotel’s strategy to provide impetus to its in-house food and beverage capabilities, attract more customers, which in turn drive the average daily rate at existing hotels and support Morgans Hotel‘s strong expansion pipeline. Having an industry-leading food and beverage service will also help Morgans to clinch some new management deals thus creating an even more ascendable model going forward.
TLG has already started to revive food, beverage and nightlife operations at Delano South Beach, expected to be complete in January 2012. Morgans expects to generate approximately $2 million of incremental EBITDA in 2012 from the Delano property. Morgans Hotel currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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