Held to the law, so far

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.