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On August 3, I warned that investors who thought they stumbled on an easy triple with Accredited Home Lenders (LEND) were in for a rude awakening:

“With a buyout price of $15.10 and a close yesterday of $5.31, the spread is huge. That is not an opportunity; its a danger sign. It shows that the best and brightest arbitrageurs on the street, who have access to far more information than you and I, don’t believe the deal will close as negotiated.”

After the bell on Friday, Lone Star filed an amendment to its tender offer stating:

in light of the drastic deterioration in the financial and operational condition of the Company, among other things, as of today, the Company would fail to satisfy the conditions to the closing of the tender offer. Accordingly, Purchaser does not expect to be accepting Shares tendered as of the end of the current offer period ending at 12:00 midnight, New York City time, on August 14, 2007.

In other words, the deal is off, and according to Lone Star, its Accredited’s fault.

Accredited Home Lenders will undoubtedly sue to attempt to force Lone Star to go through with the deal. In a press release issued Friday night, Accredited stated that:

the Agreement and Plan of Merger with Lone Star expressly provides that changes generally affecting the non-prime industry in which the Company operates which have not disproportionately affected the Company do not provide a basis for Lone Star to not honor its obligations” and promised to “hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations.

But the company’s own SEC filings indicate this will be an uphill battle. On Friday, Accredited filed an filed an NT-10Q admitting that the company was negatively impacted both by industry conditions and by specific problems attributable to loans it acquired in connection with its purchase of Aames Mortgage last fall. I’m sure that a bevy of lawyers are already planning arguments on both sides, but I wouldn’t count on a victory for LEND.

Merger arbitrage is a tough game even for professionals. For individual investors it can be deadly.

DISCLOSURE: No position.

Source: Accredited Home Lenders: Buyout Gets Scrapped