Accredited Home Lenders Gains Backing of Stark Investments

Accredited Home Lenders Holding Co.'s (NASDAQ: LEND) rejection of Lone Star's reduced offer and plan to get nothing less than the $15.10 per share of common stock that was offered in a $400 million takeover of the company by the private equity firm back in June is getting some support. Accredited's second largest shareholder, Stark Investments, which holds an 8.4% stake in the subprime company, is encouraging the board of directors to continue to make decisions consistent with the strength of Accredited's legal position. In response to Lone Star's reduced offer, Stark believes that the offer "is nothing more than an attempt to divert attention from the inherent weakness in Lone Star's litigation position under the (merger) agreement."

According to a filing with the Securities and Exchange Commission, Stark Investments also writes that,

Given that the trading price of Accredited's common stock on the New York Stock Exchange has been materially in excess of $8.50 since the announcement of Lone Star's offer on August 30, 2007, we believe the market also recognizes the weakness of Lone Star's position and is anticipating a recovery well in excess of Tuesday's closing price of $10.14.

As noted in a prior post, it seems apparent that Lone Star's adjustment of the takeover price per share to $8.50 represents a lack of faith in its ability to successfully litigate the case. According to the terms of the deal, proving a material adverse effect will be extremely tough to do because Lone Star would have to prove that the deterioration in the subprime market affected Lone Star more so than other lenders in the industry.

At this point, with the stock trading at $10.30, which is well above Lone Star's rejected offer, the market has plenty of confidence the deal will go through at the original price, especially after the comments that Stark made on Tuesday (Accredited shares popped on that news by 6% near the end of the close).

While the matter is still in Delaware Chancery Court, it's inevitable that Lone Star caves in at a higher price with Accredited having the upper hand. Plus, it's probably in its best interest to put this behind them. Dragging this on won't benefit Lone Star - it has got its reputation to think about. Prolonging this will only hurt deals Lone Star pursues in the future as it does not want to be known as a firm that has a history of backing out.