ADS files suit to force Blackstone buyout

The Blackstone Group has become the latest private equity shop to be sued after indicating it would abandon a deal agreed prior to credit market volatility and slowing economic indicators. Lone Star Funds, JC Flowers and Cerberus Capital Management are among the firms that have recently been taken to court for scrapping deals, most having claimed a material adverse change in the target’s business had occurred. But in Blackstone’s case, it’s faulting a regulator that intervened.

Alliance Data, a Texas-based provider of transaction, credit, and marketing services, has commenced litigation to force Blackstone to carry out the $7.8 billion leveraged buyout deal it inked in June 2007.

“We regret that ADS has felt compelled to file this suit, but we believe it is utterly without merit,” a Blackstone spokesman said.

Last week Blackstone said in a letter it didn’t expect closing conditions could be met due to “extraordinary measures” required of ADS and Blackstone by the Office of the Comptroller.

The regulator told Blackstone it would have to give “open-ended guarantees of capital and liquidity for its target as the debt on the financial services firm soars from less than $1 billion to $6 billion”, The Financial Times reported. Blackstone said the regulatory measures are “unprecedented and unacceptable financial and operational requirements that would impose an unlimited and indefinite liability on Blackstone and its funds”.

Alliance Data noted that the private equity firm also said it felt alternative solutions would not be accepted by the OCC, and deemed further negotiations futile.

Alliance Data said in a statement that it “believes that the OCC's requests are reasonable and that Blackstone has the ability to satisfy them and obtain the required approvals, but that Blackstone has chosen not to do so as part of its apparent business decision not to complete the merger on its terms, if at all”.

The lawsuit has been flied in the Delaware Court of Chancery.

Blackstone recently walked away from its $1.8 billion buyout of mortgage and leasing group PHH. During a recent investor call, Blackstone chairman Stephen Schwarzman said the trouble it encountered securing financing for the deal did not imply there would be problems with other agreed deals in its pipeline.

“I think those were sort of very specific circumstances around a part of the economy which is in virtual free fall,” Schwarzman said.