Greenwich, Conn. — Affiliates of Cerberus Capital last month 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 after United announced Cerberus' decision. The Cerberus decision set off a series of legal maneuvers on the part of both United Rentals and the Cerberus affiliates.
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 the decision 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 had predicted 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 month told United Rentals 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 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. 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. 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.
In October, 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.’”
United Rentals promptly filed a lawsuit Nov. 19 against RAM in Delaware Court of Chancery to force the private equity group to go through with the acquisition, contending that the “specific performance” clause in the merger agreement gives United Rentals the right to compel “consummation of the merger in the present situation.” United said, in a statement, that Cerberus' repudiation of the deal “is nothing more than a naked ploy to extract a lower price at the expense of United Rentals' shareholders.”
Cerberus, for its part, then sued in New York state court to limit its potential liability for the failed transaction to the $100 million buyout fee. The Cerberus lawsuit seeks to force United Rentals to abide by terms of the July 22 agreement that provided for a $100 million fee should it back out of the deal.
On Nov. 30, United Rentals filed a motion requesting summary judgment against Cerberus.
United Rentals is No. 1 on the RER 100.
