August 31, 2007
Lone Star's "Smart" Move?
Last night Lone Star delivered a letter to the board of Accredited Home Lenders offering up a compromise to resolve their material adverse change litigation. In the letter Lone Star offered to amend their merger agreement to lower the consideration being paid to $8.50 a share, a 44% cut from the $15.10 it has agreed to pay but well above the closing price of Lone Star yesterday, $6.31. If AHL agrees to this proposed amendment Lone Star stated that it would waive all breaches of the agreement that it claimed occurred prior to the date of amendment, including the MAC event that is the subject of the litigation. In connection with the agreement, Lone Star also offered up a go-shop to permit AHL to solicit and entertain acquisition proposals from third parties.
First the easy part, the go-shop. Don't read too much into this. Given the poor state of AHL's business, the stock price of AHL today is not a piece of equity in a functioning business but rather almost wholly a potential claim to receive Lone Star's offered price. Given this, no third party bidder is likely to emerge and Lone Star is probably offering this up for cosmetics more than anything else.
Second, one can surmise that Lone Star sent this letter for one of two reasons:
1. Lone Star has now come to the realization that it has a shaky MAC case and is trying to compromise to cut its losses. (For more on this see my prior post here)
2. Lone Star has always known that it had a shaky MAC case and this letter is part of its strategy to cut its losses.
The Lone Star people are smart money, so I'd prefer to think that they are following option two. If so, they are making the best of a bad hand. By asserting a MAC and permitting the stock to free-fall, their new offer looks like a god-send to many shareholders. Moreover, given that AHL has admitted it might not be able to continue as an operating business it has a real incentive to bring Lone Star to the table. Litigation is always uncertain and so both AHL and Lone Star also have an additional incentive to compromise. Thus, I would expect the parties to now agree at a figure in between Lone Star's offer and the previous offer price. But by asserting a MAC in this way Lone Star has effected the course of the negotiation to a large extent; a move that will likely save it millions if not hundreds of millions of dollars. Other acquirers in a similar position should take note.
Addendum: Lone Star's move is a bit surprising coming a month before the hearing in Delaware court and the day before Labor Day weekend Friday -- a slow trading day. That it would move this early is perhaps a suggestion that the credit and other markets are stabilizing and Lone Star wants to act before AHL can itself stabilize and demand a higher price.
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