United Buyer Cerberus Backs Out of Acquisition Agreement

Nov. 16, 2007
Affiliates of Cerberus Capital last week backed out of a $6.7 billion agreement to acquire United Rentals, causing shares in the Greenwich, Conn.-based rental company to plunge 30 percent in one day.

Affiliates of Cerberus Capital last week backed out of a $6.7 billion agreement to acquire United Rentals, causing shares in the Greenwich, Conn.-based rental company to plunge 30 percent in one day.

United’s shares dropped $10.25 to $23.77 in New York Stock Exchange composite trading after Reuters reported Cerberus was considering pulling out of the transaction. Cerberus decided not to go through with the acquisition at the $34.50 per share price it agreed to in July.

For Cerberus it marks the second time in less than a month it has reneged on a leveraged buyout. The decision was a surprise to many in the equipment rental industry to whom it seemed the transaction was proceeding according to plan. However, some industry participants and analysts have been predicting all along that Cerberus would choose to scuttle the deal, despite having agreed to pay United a $100 million termination fee should the company back out of the deal unless it could show there was “material adverse change” in United’s financial condition. However, Cerberus last week told United there had been no such change, and that it had commitments from its banks to finance the transaction through bridge facilities, United Rentals said.

“United Rentals views this repudiation by Cerberus as unwarranted and incompatible with the covenants of the merger agreement,” United officials said in a statement. “Having fulfilled all the closing conditions under the merger agreement, United Rentals is prepared to complete the transaction promptly.”

RAM Holdings, the Cerberus affiliate, cited “sustained volatility” in the credit markets as a reason for its concerns about the $6.7 billion offer. According to a filing Thursday with the Securities and Exchange Commission, Cerberus officials contacted United Rentals and its financial advisers in August, about five weeks after agreeing to the acquisition “as conditions in the capital markets continued to worsen.” However, United Rentals said, in a September letter to Cerberus that changes in credit-market conditions had been widely known and were discussed at length during negotiations. United said there was no justification for Cerberus to claim that market changes were unanticipated.

Last month Cerberus withdrew a $6.2 billion offer to acquire Dallas-based Affiliated Computer Services, citing difficulties selling debt to fund the deal. More than one Wall Street analyst opined that Cerberus is also facing concerns about its $7.4 billion purchase of 80 percent of U.S. automaker Chrysler.

While some analysts might see Cerberus’ decision as a lack of confidence in the cyclical rental industry, particularly in view of the struggling housing construction market, others see it as a reflection of the volatilities in the credit market. “It’s more of an indictment of the capital markets in general and not of the rental industry,” said merger and acquisition specialist Gary Stansberry of Hageman, Stansberry & Associates. “It’s a reflection of what is going on in a lot of capital markets. For a long time there was a lot of capital on the sideline, and deals were plentiful. However, now deals are being re-examined in all different industries. Unfortunately six months earlier this deal would have flown through and people would say ‘look at the strong dynamics in the rental market, look at that deal.’”

In a letter dated this past week, Cerberus reiterated it would discuss a new price on a revised agreement, stating “we would need to reach resolution on advised terms within a matter of days.” Cerberus has not disputed that it would pay the $100 million termination fee if a new agreement could not be reached. United Rentals has retained the law firm Orans, Elsen & Lupert LLP to represent it in the matter.

United said Cerberus has received binding commitment letters from its banks to provide financing for the transaction through bridge loans. When the offer was originally made in July, Bank of America, Morgan Stanley, Credit Suisse and Lehman Brothers committed to finance the deal if the money could not be raised elsewhere.

The acquisition was expected to close last week. On Oct. 19, United’s shareholders approved the buyout with nearly 99.8 percent of the stockholders voting to approve the deal.

United recently reported strong third-quarter earnings, with net income from continuing operations jumping to $111 million, or 97 cents per share, a 26 percent year over year increase, and about 4 cents higher per share than analysts expected.

United Rentals is No. 1 on the RER 100.

At the close of trading Friday, United Rentals share price was $23.37.