Wednesday, August 15, 2007
Yesterday, Lone Star announced that it is extending its tender offer for all of the outstanding shares of common stock of Accredited Home Lenders Holding Co. The tender offer was set to close at midnight, on August 14, 2007. The extension is until 12:00 midnight on August 28, 2007. In extending the tender offer Lone Star relied upon Section 2.01(d)(iii) of the Merger Agreement which requires that:
if, on the Initial Expiration Date or any subsequent date as of which the Offer is scheduled to expire, any Offer Condition is not satisfied and has not been waived, then, to the extent requested in writing by the Company, Purchaser shall extend the Offer for one or more periods ending no later than the Outside Date [Ed. Dec. 31, 2007], to permit such Offer Condition to be satisfied; provided, however, that no individual extension shall be for a period of more than ten (10) business days . . .
According to Lone Star's press release, AHL made such a request. Lone Star was therefore required under the merger agreement to extend the offer. Lone Star's only other alternative was to repudiate or terminate the agreement. But, Lone Star can only terminate the agreement under specified circumstances, including a breach of a representation or warranty of AHL. Here, there does not appear to be such a breach; rather Lone Star is asserting the failure of a condition. On the publicly available facts, Lone Star therefore appears to have no grounds to currently terminate the agreement. And repudiation would place Lone Star as the bad guy in Delaware Chancery Court and possibly enhance their liability. Thus, Lone Star's choice to extend the agreement is really a non-event, something required under the Agreement until the resolution of the Material adverse change issue in Delaware Chancery Court.
But, tell that to the day-traders and others who are furiously trading this stock. It is up $1.14 as I write or 20.73% on Lone Star's announcement. How is that for market irrationality? Investors/traders attempting to arbitrage this event would do better simply analyzing Lone Star's ultimate case (for more on that see my post Lone Star's Pickle).