Cerberus, Chatham end Innkeepers hotels purchase

WILMINGTON, Del./NEW YORK Mon Aug 22, 2011 4:28pm EDT

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WILMINGTON, Del./NEW YORK (Reuters) - Cerberus Capital Management LP CBS.UL and Chatham Lodging Trust (CLDT.N) ended their $1.12 billion agreement to buy 64 hotels owned by the bankrupt Innkeepers USA Trust INKPQ.PK.

In a joint statement on Monday, Cerberus and Chatham said a "material adverse" change had taken place since the May 16 agreement, entitling them to withdraw. Neither specified whether the change related to the marketplace or Innkeepers itself.

Material adverse clauses let buyers pull out of deals in cases of changes to the market or the purchased company.

In recent weeks, stock markets have slid, credit conditions have tightened and high-yield bond spreads have widened, amid concern about the health of economies worldwide. Hotels may also be hurt in any economic slowdown if consumers reduce discretionary spending and companies cut business travel.

Lodging is "not the place to be in a downturn," Barclays Capital said in an August 19 report.

About 63 percent of the purchase price -- roughly $700 million -- would have been financed with debt.

While that ratio is "lower than average," it still made the deal vulnerable to economic fluctuations, Patrick Scholes, a lodging and gaming analyst with FBR Capital Markets, said last month.

Scholes also said in a client note from last week that Chatham, a real estate investment trust, may resurrect the deal with another partner to replace Cerberus, a private equity firm.

A lawyer and a spokeswoman for Innkeepers did not immediately respond to requests for comment. Spokesmen for Chatham and Cerberus declined to comment.

Innkeepers operates hotels under the Hilton, Hyatt and Marriott brands. It filed for bankruptcy in July 2010 with $1.29 billion in secured debt.

Cerberus and Chatham had won a May auction for the 64 hotels.

The clause in Cerberus' commitment letter appeared to be "buyer friendly," according to Robert Miller, a professor at Villanova University School of Law.

He said when material adverse change clauses are invoked, it usually leads to talks, rather than litigation, and ultimately a lower sale price. Courts have almost always sided with the seller in material adverse change disputes, Miller said.

Shares of Chatham closed down 30 cents at $10.12 on the New York Stock Exchange.

The case is in re: Innkeepers USA Trust, U.S. Bankruptcy Court, Southern District of New York, No. 10-13800.

(Additional reporting by Jonathan Stempel; Editing by Steve Orlofsky)

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