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Cerberus axes $6.6bn United Rentals buyout

Cerberus is joining KKR, Goldman Sachs and JC Flowers to become the latest buyout firm to walk away from a megadeal agreed before the liquidity crisis.

Cerberus Capital Management has informed the world’s largest equipment rental company, United Rentals, that it is “not prepared to proceed” with the $6.6 billion (€4.5 billion) buyout it agreed in late July, making it the latest in a string of megadeals set to fall apart in the wake of debt market turbulence.

Cerberus has offered to pay a $100 million break-up fee or renegotiate the deal’s financial terms, as Lone Star recently did with its buyout of subprime lender Accredited Home Mortgage.

“The agreement was negotiated in July 2007, when the debt capital markets were beginning to deteriorate,” Cerberus said in a statement. Because of resulting uncertainty, Cerberus said it agreed to pay a higher price for United Rentals but required an unconditional $100 million break-up fee, not dependent on a material adverse change clause.

“As one indication of the importance to Cerberus of this limitation of liability under its guarantee, the parties agreed that in the event that United Rentals challenged the validity of the limitations set forth in the guarantee, United Rentals would forfeit its right to recover any amount under the guarantee,” the firm said.

Cerberus said it approached United Rentals in August, “as conditions in the capital markets continued to worsen” but that company officials refused to meet or engage in dialogue.

Since August, the buyout firm said it “has been diligent in its efforts to consummate the transaction, but has encountered sustained volatility in the credit markets, which has had a variety of adverse consequences”.

United Rentals issued a statement noting it has fulfilled the agreement’s closing requirements, that its business is performing well and that it believes Cerberus is in violation of their agreement.

The equipment rental company also noted that Cerberus should not have a problem securing debt financing that Bank of America, Credit Suisse, Morgan Stanley and Lehman Brothers agreed to provide. The buyout firm has “received binding commitment letters from its banks to provide financing for the transaction through required bridge facilities”, it said.

United Rentals said it is prepared to close the deal, and has hired law firm Orans, Elsen & Lupert to assist in possible legal action against Cerberus.

The value of cancelled deals globally has already broken the $200 billion mark this year, far surpassing last year’s total of $127.1 billion, according to data provider Dealogic. US deals gone bad have accounted for $63.4 billion of the total, among them Silver Lake’s and ValueAct’s $3 billion buyout of data company Acxiom and Kohlberg Kravis Roberts’ and Goldman Sachs’ $8 billion buyout of stereo maker Harman International Industries. A JC Flowers-led consortium’s $25 billion buyout of US student lender Sallie Mae may join them if a Delaware court decides the buyers can walk away.