Cerberus CEO testifies on sour United Rentals deal

By Jonathan Hurdle

GEORGETOWN, Delaware (Reuters) - Cerberus Capital Management LP's CBS.UL chief executive testified on Tuesday that his firm's liability in withdrawing a $4 billion offer for United Rentals Inc (URI.N) is limited to $100 million, and his firm cannot be forced to complete the deal.

Stephen Feinberg's statements in court -- a rare public appearance by Cerberus' reclusive founder -- deflated hopes for a settlement between his firm and the equipment rental company in their contentious battle over a broken leveraged buyout.

Shares of Greenwich, Connecticut-based United Rentals dropped 5 percent to $23.05 on Tuesday, erasing nearly all of their gains from Monday when settlement discussions delayed the opening day of the court hearing by a day.

The three-day trial, which will resume on Wednesday morning, aims to determine whether Cerberus is to pay a $100 million break-up fee for pulling its offer or whether the firm should be forced to complete the $4 billion takeover.

Feinberg has preferred to remain out of the spotlight during his firm's rapid growth from a small hedge fund focused mainly on distressed debt investing to one of the largest private equity/hedge funds in the world.

But United Rental's lawsuit against RAM Holdings Inc, a Cerberus acquisition vehicle, brought Feinberg to the witness stand on Tuesday.

"I thought the banks would fund ... There was certainly some risk in it. The markets were tough," Feinberg testified before Chancellor William Chandler III.

New York-based Cerberus owns a majority stake in General Motors Acceptance Corp and owns automaker Chrysler, two investments that have come under pressure lately.

Its broken deal involving United Rentals, however, has attracted most of the negative attention on the firm.

United Rentals has said Cerberus had committed financing from the banks. Feinberg testified that the banks got nervous as the deal neared its close.

"The banks were giving us a hard time and they weren't happy with funding it. There were a number of issues and conditions that were there. They were nervous in this tough financial environment," he said.

Cerberus withdrew its $34.50-per-share offer for United Rentals on November 14, sending its stock down 30 percent that day. United Rentals sued Cerberus in a bid to force completion of the deal, citing a clause in the merger agreement that United Rentals believes prohibits calling off the transaction.

Unlike other broken private equity deals in the last few months, Cerberus did not cite a material adverse change in the business as a reason for backing out. Rather, it cited uncertainty in the credit and financing markets.

The underwriters on the deal were Credit Suisse (CSGN.VX), Banc of America (BAC.N) Securities, Morgan Stanley (MS.N) and Lehman Brothers LEH.N. Investment bank UBS AG (UBSN.VX) advised United Rentals on the deal.

Taking center stage in the case is a clause in the merger agreement known as "specific performance," which United Rentals says gives it the right to force Cerberus to complete the deal at the original price.