Cerberus Capital Management LP reached a tentative settlement with Innkeepers USA Trust over claims that it breached an agreement to buy the hotel company, according to two people with knowledge of the discussions.
Under the settlement Cerberus and Chatham Lodging Trust (CLDT) will cut the amount they pay for Innkeepers, said the people, who didn’t disclose the new price and asked not to be named because the talks are private. The accord, which capped a weekend of negotiations, isn’t final and could fall apart, they said. A definitive agreement is subject to approval by the U.S. bankruptcy court judge overseeing Innkeepers’ restructuring.
Cerberus, a New York-based private-equity firm, and Chatham in August terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers, citing a clause that allowed them to back out if there was an adverse change in the lodging company’s business. Innkeepers, which sued to force the buyers to go through with the May 16 deal, would have had to rework its reorganization plan if it lost the case.
“If the buyer’s willing to pay less but its still an acceptable price, you take that rather than risk it all in the litigation,” said Evan Flaschen, chair of the financial restructuring group at Bracewell & Giuliani LLP in Hartford, Connecticut, who isn’t involved in the case.
“The parties are in negotiations but no settlement has been reached yet,” Marc Beilinson, chief restructuring officer of Palm Beach, Florida-based Innkeepers, said in a statement. “The trial is currently set to begin tomorrow at 10 a.m., and Innkeepers will be fully prepared to proceed with litigation if a settlement is not reached today.”
Officials at Cerberus and Chatham declined to comment.
Cerberus and Chatham said in court papers that the downgrade of U.S. sovereign debt by Standard & Poor’s, reduced expectations for the economy and a decline of 30 percent to 40 percent in the equity market value of similar companies triggered the so-called material adverse effect clause in the takeover deal.
The firms had sought return of their $20 million deposit, and said that while Innkeepers can fight over whether it’s entitled to keep the deposit, the terms of the agreement bar them from suing for damages.
“There is no dispute that the lodging industry is highly sensitive to macroeconomic factors,” lawyers for Cerberus and Chatham wrote.
Cerberus and Chatham cited the material adverse effect clause to end the deal because they wanted to renegotiate a better price, lawyers for Innkeepers said in court papers, adding that internal communications at Cerberus confirmed that objective. The MAE clause isn’t a “tool to extract additional profits from a debtor,” lawyers for Innkeepers wrote.
“These hotels’ brightest days are ahead of them,” the Innkeepers lawyers said in court papers. “The lodging cycle is on the upswing.”
Chatham’s Chief Executive Officer, Jeffrey Fisher, was previously a CEO and president at Innkeepers for 13 years, and the companies have similar businesses, making Fisher aware of hotel industry trends, Innkeepers said in court papers.
Innkeepers owns hotels in 20 U.S. states and the District of Columbia, including Residence Inns by Marriott and Hampton Inns.
A trial on the dispute, scheduled to start today, was adjourned until tomorrow, according to court papers. Innkeepers lawyer Paul Basta and Cerberus lawyer Howard Godnick didn’t immediately return calls for comment.
“People would have liked to see a decision to get more jurisprudence on MAE clauses at this particular time for the economy,” Bracewell & Giuliani’s Flaschen said.
Echoes of Crisis
Private-equity buyers resorted to MAE clauses in the depths of the collapse of credit markets in 2007 and subsequent recession, aborting takeovers of companies including Canadian phone company BCE Inc. (BCE), which at the time would have been the largest leveraged buyout on record. Today, a surge in borrowing costs, concern that the economy has stalled and skittish lenders are again threatening deals, including in cyclical industries such as travel.
Cerberus and Chatham won an auction to acquire the Innkeepers hotels after topping a $970.7 million offer from a unit of Lehman Brothers Holdings Inc. and Five Mile Capital Partners. Innkeepers’ initial Chapter 11 petition listed assets of $1.5 billion against debt of $1.52 billion.
Innkeepers, whose parent is managed by an affiliate of Leon Black’s private-equity firm Apollo Global Management LLC, had a prearranged reorganization plan proposed by Apollo and Lehman Ali, a unit of bankrupt Lehman Brothers Holdings, when it first filed for bankruptcy. Creditors rejected that plan.
Chatham, a Palm Beach-based hotel-investment company, owns properties under Hilton brands including DoubleTree and Hampton Inn, and Marriott brands including Courtyard and Residence Inn, according to its website.
The lawsuit against Cerberus is Innkeepers USA Trust v. Cerberus Four Holdings LLC (In re Innkeepers USA Trust), 11-02557, U.S. Bankruptcy Court, Southern District New York (Manhattan). The Chapter 11 case is In re Innkeepers USA Trust, 10-13800, in the same court.