Held to the law

Lone Star Group's efforts to renegotiate its bid for Accredited Home Lenders have failed, as the publicly listed mortgage company rejects the lower bid and pursues a lawsuit to maintain the original offer price. The Taxas-based buyout firm suggested a new price for the San Diego business on August 30, representing a 44 percent discount on its initial bid. Accredited responded by calling the offer ?not in the best interest of shareholders? and is proceeding with its lawsuit currently slated to go to trial on September 26.

The lawsuit was filed in response to Lone Star's first attempt to walk away from the agreement through a filing with the Securities and Exchange Commission on August 10th that accused the mortgage company of failing to satisfy the conditions for the closing of the tender offer, and explained that the firm didn't expect to accept the shares tendered on August 14. Accredited then filed a lawsuit and the Delaware Court of Chancery established an expedited trial.

Lone Star next drafted an amended agreement that, in addition to lowering the price, permitted Accredited's board to solicit new bids and would allow the mortgage company to cancel its current deal with Lone Star in lieu of a higher offer. The letter to the company's board proposing the new price noted that while it was a lower offer it still represented a 35 percent premium on the price for the company at the time.

That revised offer was promptly rejected at that time on August 31. By then, the company had already lost two-thirds of its value against the backdrop of a broader collapse of the market for subprime mortgage loans. Accredited also announced substantial job cuts and loan applications for third parties to keep the company afloat during the current crisis.

Accredited argues that Lone Star's agreement allows that changes affecting the non-prime industry that do not have a disproportionate impact on the company's business cannot be used as reason for firm to cancel the deal. Furthermore, the company stresses that the agreement doesn't void Lone Star's obligations if the company's financial condition, liquidity or stockholders' equity deteriorates stemming from circumstances that existed when the agreement was signed.

Recently a major shareholder in Accredited, Stark Investments, went public in their support for the company's attempt to hold the private equity shop to the original agreement, citing the inherent weakness in Lone Star's litigation position. The stakes are high for the mortgage company as some analysts expect a bankruptcy filing from Accredited if the deal should indeed fall through.