Credit crisis claims Cerberus, United Rentals deal

NEW YORK (Reuters) - United Rentals Inc said on Wednesday that Cerberus Capital Management is withdrawing its $4 billion takeover offer, the latest casualty of the credit crisis and a sign other leveraged buyouts nearing their close may face a similar fate.

Confirmation of the withdrawal helped push stocks lower near the end of the U.S. trading session.

"Cerberus is not prepared to proceed with the purchase of United Rentals on the terms set forth in its merger agreement," the equipment rental company said in a statement issued 17 minutes before the market close. Cerberus declined to comment.

Reuters had reported earlier on Wednesday, citing sources, close to the deal, that Cerberus was considering withdrawal, worried about United Rentals' economic outlook, and the troubles investment banks were having with selling an associated debt offering.

Shares of United Rentals closed down 31 percent to $23.50 after falling 27 percent following the earlier Reuters report.

New York-based Cerberus, a private equity firm and hedge fund had offered $34.50 per share for the company. A source close to the matter said that United Rentals' board is not renegotiating the price.

Cerberus' agreement to buy the company in July came right as the credit markets seized up from the subprime mortgage meltdown. That led to a string of leveraged buyouts falling apart, as buyers became concerned about companies' financial future and banks got stuck with buyout debt they couldn't offload from their balance sheets.

Cerberus is not citing a material adverse change (MAC) at United Rentals, according to the company. That means Cerberus will likely be the one responsible for paying the $100 million break up fee.

It also means Cerberus will not be able to use a MAC to defend its actions should United Rentals and shareholders decide to sue over the broken agreement.

United Rentals said Cerberus' rejection of the deal was "unwarranted and incompatible with the covenants of the merger agreement."

LETTERS SHOW CONCERNS

According to letters obtained by Reuters, Cerberus was worried about the credit and financing markets roughly a month after the July agreement.

"Our request for a discussion was prompted by our concerns about recent unanticipated developments in the credit and financial markets," Cerberus' Steven Mayer said in a letter to United Rentals on August 31.

United Rentals replied a week later, saying that credit market concerns are clearly stated in the merger agreement. To read the letters click on tinyurl.com/ynr42x.

Cerberus "has committed debt financing, which by its terms is not conditioned on the developments referenced in your team's letter," United Rentals board member Keith Wimbush wrote in a September 6 letter to Cerberus founder Stephen Feinberg.

"(Cerberus) repeatedly represented at the time of our negotiations that Cerberus prided itself on not renegotiating its deals," the Wimbush letter says.

Greenwich, Connecticut-based United Rentals, with more than 690 rental locations in 48 states, Canada and Mexico, rents everything from backhoes and excavators for demolition work to welders and generators needed for pipe fabrication.

United Rentals said free cash flow in the third quarter was $43 million, compared with $123 million in the year-ago period. The company said the drop in free cash was due to increased use of working capital. Private equity firms need strong cash flows to pay down debt used for leveraged buyouts, and cash is a big factor in the debt financing.

United Rentals said on Wednesday that its business continues to perform well, with strong third quarter results reported October 31 and success with its revised strategic plan.

In addition to angering United Rentals, Cerberus could attract the ire from private equity firm Apollo Management.

Apollo, which as of July owned about 18 percent of the voting power of United Rentals' stock, agreed at the time to vote its shares in favor of the deal. Apollo founder Leon Black is on the United Rentals board.

The debt underwriters were Credit Suisse, Banc of America Securities, Morgan Stanley and Lehman Brothers.

Investment bank UBS AG advised United Rentals on the deal.

(Reporting by Michael Flaherty; Editing by Tim Dobbyn)