| NEW YORK
NEW YORK Cerberus Capital Management LP's deal to buy 64 hotels from bankrupt Innkeepers USA Trust could still go forward, but at a lower price, two people close to Innkeepers and its creditors said on Wednesday.
Private equity firm Cerberus and its joint venture partner Chatham Lodging Trust (CLDT.N) on Friday terminated a deal to buy the hotels for $1.12 billion, including $700 million of debt, but are open to a new agreement if Innkeepers and its creditors renegotiate, the people said.
Spokesmen for Chatham and Cerberus declined to comment on Wednesday. Innkeepers also declined to comment. The sources requested anonymity because they are not authorized to discuss negotiations.
Cerberus and Chatham won the hotels in a bankruptcy auction in May, but invoked a clause in the paperwork to let them back out if there were a "material adverse change" at Innkeepers, which has been under Chapter 11 protection for a year.
That trigger was recent financial volatility threatening the stability of the real estate market, the people said.
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 be hurt in a slowdown by consumers reducing discretionary spending and companies cutting business travel.
Innkeepers has called the termination inappropriate and said it was considering legal options. Its board has not yet discussed the situation, one of the people said.
Innkeepers could decide to challenge the decision to cancel the sale by suing for breach of contract or to enforce the sale agreement, said Peter Neckles, a managing director with financial advisory firm Duff & Phelps Corp who is not involved in the case.
Robert Miller, a professor at Villanova University School of Law, said a lawsuit could help Innkeepers because courts historically rule in favor of sellers contesting the invocation of MAC clauses.
However, the Cerberus MAC clause is buyer-friendly, letting the firm withdraw upon events that "could" alter "prospects" for Innkeepers' business, Miller said.
"The standard M&A book says you as the seller never put the word 'prospects' in the MAC," Miller said. "All Cerberus needs to do is say, 'Everyone has revised downward their economic forecasts,' and that's a MAC."
Most likely, Miller said, both sides will reopen talks and settle on a new takeover price, especially given that Cerberus and Chatham have already done due diligence.
Innkeepers' creditors will play a big role in the talks, he said.
"The real fight is with the creditors because they're the ones getting the money," he said.
HOW LOW COULD IT GO?
Innkeepers' main secured creditors are Midland Loan Services Inc, which services its fixed-rate mortgages and was to provide financing for the sale, and Lehman Ali Inc, a non-bankrupt unit of Lehman Brothers Holdings Inc LEHMQ.PK.
A lawyer for Midland declined to comment. Lawyers for Lehman Ali did not return calls for comment.
If a new price cannot be agreed upon, Innkeepers could shop itself to others, perhaps including Lehman Ali and investment firm Five Mile Capital Partners, which lost out to the Cerberus/Chatham venture by just $25 million.
How far the price could fall remains unclear.
One of the unnamed sources said it is unlikely to dip lower than the losing bid from Five Mile and Lehman Ali, or else a new auction might need to be scheduled. But if financing becomes a problem, the price could fall further.
"You have to move down to a place where people can get financing," Neckles said. "Right now, that could mean a significant reduction in the tens or twenties of millions, if not more."
Miller predicted a drop of 20 percent to 30 percent.
A Chatham unit has already acquired five additional Innkeepers properties in a separate $195 million deal in bankruptcy court. That acquisition is not affected by the termination.
The case is In re Innkeepers USA Trust, U.S. Bankruptcy Court, Southern District of New York, No. 10-13800.
(Reporting by Nick Brown; Additional reporting by Tom Hals; Editing by Gerald E. McCormick and Phil Berlowitz)