Monday, November 19, 2007

Shotgun Wedding

This should be interesting.

United Rentals, Inc. filed a lawsuit today in the Delaware Chancery Court to compel Cerberus Capital Management to go through with its agreed $34.50 per share take-private of the company. The $7 billion planned wedding began to look a little shaky last Wednesday, when Reuters began running stories hinting that Cerberus was getting cold feet and might walk away from the deal.

It turns out that the prospective groom delivered a "Dear Sally" letter to URI that very day, explaining that he just wasn't ready for marriage, but was willing to try a little experimental cohabitation (at a lower price) instead. If URI did not agree, Cerberus made it clear he was ready to send a really nice box of chocolates (and $100 million wrapped up in a bow) as a farewell present, "no hard feelings."

Apparently the would-be bride, surrounded by hundreds of wedding reception centerpieces, custom printed cocktail napkins, and a two-hundred pound melting ice sculpture of Rodin's The Kiss, took the letter a little poorly. For one thing, the wedding itself was only days away, and for another Mrs. Cerberus-to-be was distinctly in a family way, pregnant with a full-term bouncing baby LBO. News that Cerberus might pull out of the deal sent her social standing plunging over 30% on the New York social circuit and almost guaranteed her little darlings would never get into Greenwich Country Day School. It did not help matters that she suspected Cerberus himself or his college drinking buddies were the scallywags who leaked the embarrassing news to the press.

So, being one of those modern gals who do for themselves, URI broke out the shotgun and the high priced lawyers and decided to "learn" Mr. C. just who it is that wears the pants in her family. From the evidence of her opening salvo, it looks like she's planning a long and nasty fight. Knowing that her former paramour Stephen Feinberg is of an excessively shy and retiring disposition, she made sure to identify him by name in the very first sentence of the press release accompanying the filing of the complaint today. If I were a betting man, I would lay even money on the fact that we can expect to see copious mentions of Mr. Feinberg and his associates in frequent press releases published by the company from now on. After all, URI is a public figure, so she is naturally obligated to share all important developments with her legions of friends and family on a regular basis. I wonder how Mr. C. will hold up under the pressure.

What is more interesting to me, however, is how old Steve got himself in such a predicament in the first place. According to URI's complaint, Cerberus tried to renegotiate a lower price for the deal or just walk away (after paying the $100 million reverse break up fee) because it didn't "feel comfortable" hitting up its committed financing banks for the leveraged loans to fund the deal. (Uh, excuse me, but since when did any private equity shop worth its Park Avenue address give a flying fuck in a rolling donut what pain their financing banks had to endure to fulfill a financing commitment?) Cerberus didn't invoke a "material adverse effect" or MAC clause, which URI alleges would have been the only alternative under the merger agreement which would have allowed Cerberus to repudiate the deal and pay the break up fee. In fact, URI alleges Feinberg and his associates specifically denied that an MAE had occurred when they were asked.

Of course, we have only heard the girl's side of this story to date, and we all know that Cerberus must have some sort of defense for its behavior. Unlike most "he said, she said" situations in real life, however, there is an actual legal document in this case which governs the parties' allowed behavior. According to a Bloomberg story today, Cerberus told the SEC "that it intentionally negotiated a higher price [for the deal] in order to include an 'out clause' that would allow the firm to walk away by paying the $100 million fee," so presumably it thinks there is language in the contract which supports its position. Only time—and the Delaware Chancery Court—will tell. I for one will hang on the outcome like a disease.

In the meantime, you, I, and the financial media will wait with bated breath for the details of this sordid affair to meet the light of day. Was Cerberus simply stupid, or was it trying to show its limited partners and its financing banks that hey, it tried to get out of an unfavorable purchase contract, but those nasty Delaware Court judges just wouldn't cut it any slack?

That would be a new approach: fiduciary out by reason of legal incompetence.

© 2007 The Epicurean Dealmaker. All rights reserved.