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Cerberus, Innkeepers Settle Over Hotels With $1 Billion Deal

Cerberus Capital Management LP and Chatham Lodging Trust will pay $1.02 billion for 64 hotels of Innkeepers USA Trust after settling a dispute over whether the deal could be called off because of the U.S. economic slump.

The price in the revised agreement filed today in U.S. Bankruptcy Court in Manhattan is less than the $1.12 billion Cerberus and Chatham previously offered. The sale still requires final court approval. Innkeepers’ unsecured creditors will receive the same treatment as they were promised under the bankruptcy exit plan confirmed by the court in June, according to a company statement.

“The updated agreement provides a significant cash premium to the original stalking horse bid and a meaningful return to our creditors, and it allows us to move ahead with a timely exit from Chapter 11,” Innkeepers’ chief restructuring officer, Marc A. Beilinson, said in the statement.

The so-called stalking-horse offer from Lehman Brothers Holdings Inc. and Five Mile Capital Partners valued the hotels at $970.7 million before Cerberus and Chatham made a higher bid at an auction.

Chatham fell 37 cents, or 3.5 percent, to $10.19 at 2:53 p.m. in New York Stock Exchange composite trading. Innkeepers preferred securities jumped 35 cents, or 50 percent, to $1.05. Both companies are based in Palm Beach, Florida.

Binding Agreement

In August, after Innkeepers had won approval of the terms of a reorganization, Cerberus and Chatham sought to cancel their purchase of the bulk of the company’s extended-stay, mid-priced and upscale hotels. Innkeepers, in bankruptcy since July 2010, operates 71 hotels, including Residence Inns, Marriott hotels and Hampton Inns.

Cerberus, a New York-based private-equity firm, cited a clause that allowed the buyers to back out if there was an adverse change in the lodging company’s business or the overall economy. Innkeepers sued, saying there has been no such change since reaching the binding agreement May 16.

A trial on the dispute, scheduled to begin Oct. 10, was delayed four times as the companies pursued a settlement out of court.

“If the buyer’s willing to pay less but it’s 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.

Midland Servicing

Midland Loan Services, a creditor and servicer of $825 million of fixed-rate mortgage debt, will now service $675 million and Lehman will get a cash payment of $224 million for its claims. Both agreed to the revised treatment, Innkeepers said.

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 market value of similar companies triggered the so-called material adverse effect clause in the takeover deal.

The firms had sought the return of their $20 million deposit and said that Innkeepers was barred from suing for damages. Cerberus and Chatham sought to end the deal only to negotiate a better price, Innkeepers claimed.

Chatham Chief Executive Officer Jeffrey Fisher was CEO and president of Innkeepers for 13 years and understood the economics of the hotel industry, Innkeepers said.

Innkeepers, which owns hotels in 20 U.S. states and the District of Columbia, initially listed assets of $1.5 billion against debt of $1.52 billion on its Chapter 11 petition.

Apollo Management

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 filed for bankruptcy. Creditors rejected that plan.

Chatham 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.

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