Shares of power-tool rental company United Rentals plunged 31% to close at $23.50 Wednesday after it announced that Cerberus Capital Management has backed out of its $7 billion buyout offer. The July 22 deal valued the company at $34.50 per share. "This deal was expected to close sometime this week," said JPMorgan analyst Stephen Volkmann. "The banks were struggling with selling the associated debt offering." In a letter dated Thursday, November 14, Cerberus told United Rentals that unless a lower price is agreed to, it will withdraw its bid completely. United Rental contests Cerberus's right to back out, but a person close to Cerberus said the firm expects to exit the deal with no liability beyond the $100 million breakup fee. On August 31, Cerberus executive Steven Mayer wrote to United Rentals General Counsel Roger Schwed asking for a "constructive dialogue" to discuss "our concerns about recent unanticipated developments in the credit and financial markets" and expressing a desire to review the terms of the transaction. United Rentals responded that troubles in the credit markets were not among the agreement's escape clauses, and that it was "sorely disappointed that your organization is now looking to renegotiate our deal without cause." Unlike other private equity firms that have bailed on deals in recent months, Cerberus is not claiming the target company suffered a material adverse change after the deal was signed. United Rentals is calling Cerberus's attempt to backtrack "unwarranted and incompatible with the covenants of the merger agreement" and is engaging legal representation.
Commentary: Cerberus Buys United Rentals for $4B • Wednesday's Options Report: Merrill, URI, Wendy's, ETFC, ELN [November 14, 2007]
Stocks to watch: URI. Competitors: HTZ, RRR