20.11.2007

United sues Cerberus

United Rentals has filed a lawsuit against RAM Holdings and RAM Acquisition Corp the acquisition “vehicles” formed by Stephen A. Feinberg's Cerberus Capital Management, to acquire United Rentals.

The lawsuit seeks to compel Cerberus to complete the agreed deal following its withdrawal via a letter repudiating the merger agreement even though there had been no adverse changes to United Rentals' business.

The letter was sent after a meeting led by Feinberg at which he informed United that Cerberus did not want to force its financing sources to fulfill their commitments, even though the merger agreement specifically requires them to do so. At that meeting, he apparently confirmed that there had not been any adverse changes in United’s business.

United says that it believes the repudiation is unwarranted and incompatible with the covenants of the merger agreement and “nothing more than a naked ploy to extract a lower price at the expense of its shareholders.”

United also says that the agreement gives it the right to compel consummation of the merger in the present situation, claiming that Cerberus is directly violating the merger agreement and acting in bad faith, and that it does not have the right to pay a reverse break-up fee and simply walk away.

There is no financing barrier to completing the merger, as RAM has binding commitment letters from its financing sources to provide financing for the transaction.

The United lawsuit also claims that Cerberus sought to further its scheme to buy United Rentals for less by taking advantage of the fall in the United share price that occurred after its intention to walk away from the deal was leaked to a news organisation.

Cerberus claims that it increased the offer price when negotiating the deal in order to have the option to walk away and pay a break-up fee if it decided against buying the company. United Rentals disputes this.


Vertikal Comment

Interesting times on the surface it doesn’t look like “Cerberus has a leg to stand on” and seems to be shaping up as a battle between the funding community and industry.

Cerberus is essentially saying that it prefers not to force its backers to meet their contractual obligations, preferring to default on and let down the United Rentals shareholders who clearly have a deal.

It is apparently still ready to exploit the mess it has created to pay United shareholders less than it had agreed upon.

This looks like one of the oldest tricks in the book, typical among house buyers with no scruples in a flat market.

However it is almost unheard of for a court to force a buyer to go ahead with a deal when it plainly does not wish to do so.

What happens is anyone’s most likely Cerberus is likely to end up paying United $100 million plus all the costs of this legal battle. United management and staff can hardly be looking forward to reporting to an unwilling owner with a grudge?