Morgans: They’re baaaaaaack!; Un-win at Cosmo

Just when you thought it was safe to invest in Las Vegas again, the city went to bed last night to the news that masters of disaster Morgans Hotel Group had purchased nightclub operator Light Group. Given Morgans’ propensity for scandal, disgrace and disaster (including helping to kill Echelon) during its ill-fated Hard Rock Hotel & Casino tenure, executives at MGM Resorts International must have been reaching for the Excedrin this morning. The Morgans gang that couldn’t shoot straight now has footholds in Bellagio, Monte Carlo and Aria. If I were Alan Feldman, I’d pull the covers over my head and stay out of the office for a week — or at least until he can figure out a way to spin this potential PR nightmare as a dream come true.

Remember, these are the guys who have the HRH fighting to keep its name after Rehab pool parties dragged the Hard Rock Café escutcheon through the mud, much to the chagrin of the Seminole Tribe. When the scandal-plagued Seminoles have a legitimate ethical beef with you, you’ve sunk pretty darn low.) MGM may have gotten into bed with Sam Nazarian‘s nightclub chain by choice. Its de facto partnership with Morgans is akin to a shotgun wedding. Maybe they can still close that Monte Carlo sale …

Hilariously, Morgans CEO Michael Gross boasted that he believed “the acquisition of the Light Group will position us to … drive average daily rate growth at existing hotels.” Hahahahahahaha! Oh, you kidder, you! That’s what then-CEO Ed Scheetz said when he overpaid for the HRH. Remember how he was gonna increase room rates and EBITDA? During Morgans’ reign of error, ADRs and cash flow fell significantly. (Light Group already does business with Morgans at the latter’s Delano South Beach, in Miami Beach.) A full $18 million of the $46.5 million due Light Group’s owners is contingent upon Morgans/TLG hitting certain EBITDA metrics here in Vegas (maintaining its current rate of cash flow, basically). However, if Morgans shareholders balk at electing presiding Light Group genius Andrew Sasson to the board (and I can think of no good reason why they should hesitate), he and partner Andy Masi get their additional $18 million immediately. Where they’d get it from is a good question, since Morgans is losing money hand over fist and has to be thinking that buying Light Group is the equivalent of hooking the company up to a giant ATM.

As signatories to this Faustian pact, Light Group principals Sasson (right) and Masi have tied themselves to Morgans for 2.5 and 3.5 years, respectively. In addition to each holding 5% of the new Morgans/Light Group entity (TLG Aquisition), they can convert the Morgans promissory notes into additional equity — gee, isn’t that what happened to Credit Suisse when it underwrote the HRH deal? They can also be forced out, sometime in 2018, for 7X cash flow. At Light Group’s current rate of performance, that would be a $55 million golden handshake for both gentlemen.

“Given The Light Group’s strong relationship with MGM, this transaction provides new opportunities to work with MGM on strategic partnerships,” boy wonder Gross implored, in what sounds like the Wishful Thinking Moment of 2011. (Interestingly, MGM has issued no official statement on the deal, nor supplied any boilerplate happy-talk quotations for the Morgans/TLG announcement.) Judging by the anemic movement of Morgan’s low-priced stock, Wall Street isn’t impressed by this transaction and neither am I. Theoretically, Morgans has acquired a monetary pipeline and just has to let Masi keep doing his thing. But never underestimate Morgan’s ability to screw the pooch. It’s the Ron Jeremy of pooch-screwers.

On the subject of screwing, we shouldn’t let the week end without giving a swift backhand to Cosmopolitan of Las Vegas, which has reneged on its free wi-fi. As Dr. David G. Schwartz witheringly writes, the Cosmo’s so-called curious class “might start wondering why just about every Starbucks, public library, and La Quinta Inn can afford to provide its customers with a complimentary online hook-up, but a nearly new casino resort that prides itself on its high-tech flair can’t.” Put that in your Twitter feed and smoke it, CEO John Unwin!

I’ll offer a third hypothesis to Schwartz’s two: The Cosmo casino is sucking wind and this is one of the ways Unwin is going to recoup the lack of win. When times are tough, casino managements traditionally begin by sweating comps. Charging extra may be ‘the way things are done’ on the Strip, but it’s one less way the Cosmo can differentiate itself from the competition.