Shares of United Rentals, Inc. (NYSE:URI) are being crushed with a 25% hit today.  The company announced early this morning an "Extension of Expiration Date for Current Tender Offers and Consent Solicitations" for its debt offerings. Unfortunately, there are reports out of Reuters noting the Cerberus Capital Management is considering the withdrawal of its private equity buyout for the equipment rental company. 

Cerberus is supposedly worried about the company’s economic outlook, and investment banks funding the deal are struggling with selling the associated debt offering. But the report also says that Cerberus is working with the board to come to terms on repricing the deal or reworking the debt offering  For those who watch M&A and for those who follow private equity, that is not exactly mother’s milk.

Cerberus would be obligated to pay a break-up fee if it backs out of the deal.  Frankly, these leveraged "OPM" private equity buyouts are rolling further and further down the market cap food chain.  It seems the billionaires aren’t quite as powerful nor quite as omniscient as they’d have you believe.  When a private equity firm goes out and makes a buyout offer that locks a company’s hands like this, these target companies need to be more aggressive about noting that a "slight change in the economic climate" isn’t a material change in the business.  They should also start forcing the private equity buyers to only be able to announce a "definitive merger agreement approved by both boards of directors" when the private equity firms actually have the financing in hand rather than as "tentative."

Obviously the credit markets have changed.  But even in summer when these deals were becoming more and more crowded, the writing was on the wall.  If private equity firms can’t sell a deal in the low mid-cap range, maybe their salespeople need to be evaluated.

The company posted earnings on October 31: operations diluted earnings per share of $0.97, an increase of 23% compared with $0.79 for the third quarter 2006. Income from continuing operations for the third quarter 2007 increased 26% to $111 million, compared with $88 million for the third quarter 2006. Its EBITDA was even a record for the quarter.  With its earnings, United Rentals included the following statement:

• Completion of the transaction is subject to customary closing conditions, but is not subject to a financing condition. The acquiring Cerberus affiliate has obtained debt and equity financing commitments for the transactions contemplated by the merger agreement, the aggregate proceeds of which will be sufficient to pay the aggregate merger consideration, related fees and expenses and any required refinancings or repayments of existing company indebtedness.

United Rentals stock is down over 25% today alone at $25.10, and the 52-week trading range is $23.60 to $35.56.  This isn’t the first time the chances of this merger falling apart has come into play.  The agreed price at the time was $34.50.  This traded over $35.00 all on its own back in 2006 before private equity firms went on a drunken buying binge, so accepting too much lower of a buyout might not be a great fiduciary job by management.  Even if the deal is off entirely this much lower price today would be the entire value of the company back to before the deal even came up, barring any huge hidden issues in the company.

24/7 Wall St. sends its own list out to its open email distribution list showing a list of other mergers and acquisitions where the merger-arb spread shows which other deals are indicated to be at-risk.

If this acquisition falls apart, it also impacts BRE Properties Inc.(NYSE:BRE) because it is supposed to replace United Rentals on theS&P Mid Cap 400 Index on a date T.B.A.  There have been some $200 Billion worth of deal implosions, and it seems there are still more to come…. Here is our summary of others we calculated at-risk recently.

Jon C. Ogg
November 14, 2007

Jon Ogg produces the more detailed 24/7 Wall St. subscriber-based Special Situation Investing Newsletter which covers buyouts, reorganizations, spin-offs and more; he does not own securities in the companies he covers.

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