The cheery infernal canines at Cerberus Capital Management have been pretty consistent in saying that (1) they'd rather not close on their deal to buy Innkeepers out of bankruptcy, (2) it's because there's been a material adverse effect, and (3) no, thanks, they'd rather not tell anyone what that MAE was. And in "anyone" they're going to include the bankruptcy court, as they demonstrated yesterday. The judge remains curious, however, and set a trial for October:
Judge Chapman sympathized with Innkeepers' desire to resolve the MAE issue as quickly as possible, citing widespread media coverage about the uncertainty of the deal.
She rejected Cerberus lawyer Adam Harris' argument that Innkeepers should have done more to affirm its readiness to close the deal in August.
"Come on, Innkeepers was ready to close," she said. "They were there. It's not like asking a girl to dance. You didn't need to hear from them the next day, saying: 'We're really, really ready to close.'"
Cerberus is not gambling everything on its strategy of never, ever saying what the MAE was. It released a statement saying:
The sponsors have asserted that a material adverse effect as defined in the definitive documents has occurred. The sponsors will establish the basis for their position in an appropriate manner. In addition, the bid procedures approved by the Bankruptcy Court provide that in the event the contract is terminated other than as permitted by the contract, the sole and exclusive remedy for the company is to retain the Sponsors' (US)$20 million deposit. As a result, the company has no basis to seek either specific performance or damages beyond the deposit.
Oh, how we laughed at this! Because, really, come on. Why would a court allow the bidder for Innkeepers a free option to walk away from the deal for $20 million? You go through all the pain of a bankruptcy court proceeding for a $1.1 billion company, and then you let them walk away for less than 2% of the deal value? For some context, of 181 publicly announced M&A deals in 2010, only 9 had “free option” reverse breakup fees like this, and the majority of those are above 4% of deal value, with 7% seeming to be a popular number. Twenty bucks on a $1.1 billion deal - particularly one done out of bankruptcy, where the consequences of deal failure are dire - seems pretty light.
But these things can be known, so we went and knew them, at great personal cost. Here are the bid procedures approved by the Bankruptcy Court (huge pdf), and here’s what Cerberus is referring to (page 14 of Exhibit 2, if you’re following along at home):
In the event the Successful Bidder … fails to consummate the restructuring transactions contemplated in the Successful Bid … because of a breach or failure to perform on the part of such Successful Bidder …, the Debtors will not have any obligation to return the Deposit deposited by such Successful Bidder …. Retention of the Deposit, plus accrued interest, as liquidated damages, shall be the Fixed/Floating Debtors’ sole remedy at law and in equity against the Successful Bidder ….
So, oops! Cerberus might be right - they can just walk away for $20 million, even if there's no MAE. Which might be a pretty good deal for them if recent financial-market freakouts are a sign of bad times ahead for lodging. Certainly AT&T should be jealous, given that it's on the hook for seven bajillion dollars if its recent acquisition doesn't close - even through no fault of its own.
It’s not necessarily as open-and-shut as that – after the bidding order, Cerberus did sign various things with names like “Binding Commitment Agreement” that claim to supercede everything else and don’t mention any limitation on remedies (even huger pdf). But just as with its pretty Cerberus-friendly MAE definition, Innkeepers seems to be starting from a difficult place here.