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Broken Deals Aplenty


Both Cerberus and JC Flowers are involved in recent broken deals yet both are bidding for Northern Rock.

In the broken deal of the week, United Rentals sues Cerberus:

United Rentals Inc (URI) said on Monday it filed a lawsuit seeking to force Cerberus Capital Management LP to complete its $4 bln leveraged buyout of the equipment rental company. Cerberus pulled its takeover offer of $34.50 per share last Wednesday, a move that sent the rental company's stock down 31% on the day.

Unlike other broken private equity deals in the last few months, Cerberus is not citing a material adverse change in the business as a reason for backing out. Rather, it is citing uncertainty in the credit and financing markets. United Rentals repeated its assertion that Cerberus had binding commitment letters from its financing sources and that pulling the offer is "unwarranted and incompatible" with the deal.

Recent Broken Deals

  • Silver Lake and ValueAct Capital, which agreed in May to acquire Acxiom (ACXM), will pay a $65 mln settlement in cash to terminate the merger agreement.

  • Audio equipment maker Harman International Industries (HAR) said Kohlberg Kravis Roberts & Co LP and Goldman Sachs' (GS) private equity arm pulled out of their $8 bln buyout deal.

  • The leveraged buyout of student loan provider SLM Corp (SLM), or Sallie Mae, by JC Flowers and Flowers' banks is being contested in court. Sallie Mae is suing Flowers to get its break-up fee of $900 mln.

Both Cerberus and Flowers are involved in recent broken deals yet both are bidding for Northern Rock. Let's take a look.

U.K. faces unappealing choices on Northern Rock:

Northern Rock said Monday that it had received a number of disappointing takeover proposals, increasing the pressure on the British government to find a solution for the troubled regional mortgage lender and to consider nationalizing it.

The government has lent more than £20 bln, or $40 bln, over the past two months to secure deposits at Northern Rock, many of which are pension savings, and to end the first run on a bank in the country since 1866.

A sale might help save some jobs but that would risk alienating taxpayers, who might have to continue supporting the business, according to a memorandum by the investment banks managing the sale that was leaked to the media last week. Declared bidders include the private equity firm J.C. Flowers & Company; Virgin Group's Richard Branson, who hopes to integrate Northern Rock into its Virgin Money brand; the U.S. private equity company Cerberus; and Olivant Advisers of London.

If credit conditions are so tight that Cerberus has to back out of a relatively piddly deal with United Rentals (URI) because of credit conditions, what the heck is it doing bidding on a potential $40 bln Northern Rock deal?

Cerberus looks like it's a glutton for self-inflicted punishment with its involvement in GMAC and Chrysler. See Credit Woes at General Motors, Cerberus, and Residential Capital for more on this topic. Now it is in a lawsuit with United Rentals, while bidding away on Northern Rock.

The BOE is really in a tight spot here, compounded by the fact it lent Northern Rock $40 bln. Proposals are coming in "materially below" that. The BOE has to make a deal, but all of them look bad. Yes, it's yet another Zugzwang. There are no winning moves for the Bank of England.
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