15.11.2007

United buy out off?

Cerberus capital management informed United Rentals management yesterday that it is not prepared to proceed with the purchase of the company on the terms agreed in its merger deal of July 22nd.

In that agreement Cerebus agreed to acquire United Rentals for $34.50 per share in cash, in a transaction valued at approximately $7 billion. Cerebus has apparently confirmed to United that its reneging on the deal is not due to any adverse changes at United Rentals.

United shares dropped 27 percent, to $24.79 yesterday on the news.

Sources close to Cerberus say that the private equity group is concerned about the company's economic outlook, and that investment banks funding the deal are struggling with selling the associated debt offering.

United has issued a statement saying that it views the “repudiation by Cerberus as unwarranted and incompatible with the covenants of the merger agreement. Having fulfilled all the closing conditions under the merger agreement, United Rentals is prepared to complete the transaction promptly.”

United also goes on to say “That Cerberus has received binding commitment letters from its banks to provide financing for the transaction through required bridge facilities. The Company currently believes that Cerberus’ banks stand ready to fulfill their contractual obligations.”

United Rentals has retained the law firm of Orans, Elsen & Lupert to represent as it considers its legal options.

Cerberus is reported to be working on “re-pricing” the deal or reworking the debt offering. If the two sides fail to reach any agreement Cerebus might prefer to pay a “break up fee” and walk away form the deal.

Vertikal Comment

So much for the principal of a deal being a deal, clearly Cerebus is getting nervous given the deterioration in the credit markets which could change its debt calculations. At the same time it might be concerned that the fall in the residential construction market could have an impact on United’s earnings.

United’s third quarter results were strong, however the amount of free cash that the business generated was down on the year before, and given that private equity operations need plenty of free cash to service the massive debt that they load onto such takeovers, this will also have sounded alarm bells.

This sort of action, of pulling out of a deal some three months after it signed, agreed and, one assumes – shook hands on it – when the other party has done everything it promised, is a damning indictment on the private equity fraternity which has a patchy record when it comes to owning equipment rental companies anyway.

United Rentals and its employees are almost certainly better off without Cerebus Capital.