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Equity firm to buy sub-prime lender

Accredited Home's shares jump after Lone Star Funds agrees to a deal and settles a suit.

September 20, 2007|From Bloomberg News

Shares of Accredited Home Lenders Holding Co. soared 18% on Wednesday after the San Diego-based sub-prime mortgage company reached a $296-million agreement to be acquired by private equity firm Lone Star Funds, replacing a higher-priced deal that collapsed last month.

Dallas-based Lone Star agreed to pay $11.75 a share for Accredited. The price is less than the $15.10 that the buyout firm agreed to pay in June but is higher than Lone Star's revised offer three weeks ago of $8.50.

Accredited shares jumped $1.78 to $11.56.

The lender sued Lone Star on Aug. 11 in Delaware Chancery Court, saying the buyout firm should be held to the original terms. The new agreement settles the lawsuit, which had been scheduled to start next week.

"Clearly this is a capitulation on Lone Star's part," said Matt Howlett, an analyst with Fox-Pitt Kelton who rates Accredited "outperform." "They knew they were going to lose in court."

A spokesman for Lone Star declined to comment.

Accredited's book value, or assets minus liabilities, is probably $4 to $6 a share, estimated Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. That would mean Lone Star is paying at least double Accredited's book value. Most of the independent home lenders that have avoided bankruptcy are trading at a discount to book value, Valentin said.

"This new agreement fairly settles our dispute and will expedite the completion of the merger," James A. Konrath, chairman and chief executive of Accredited, said in a statement.

"We will now turn to the business of rebuilding Accredited for a brighter future with Lone Star."

The deal comes amid the worst U.S. housing slump in 16 years and a financial crisis that has pushed a dozen lenders into bankruptcy. More than 110 companies have shut some mortgage operations or left the business since the start of 2006.

When Lone Star agreed June 4 to buy Accredited, the Texas firm said its capital would help the mortgage company "successfully manage through the current industry dynamics."

A month later, Accredited said it might have to follow other sub-prime lenders into bankruptcy proceedings. Accredited said Aug. 22 that it would close more than half its operations and fire 1,600 employees. Chief Financial Officer John Buchanan resigned the next day.

Accredited offered sub-prime loans, which are made to borrowers with poor credit or heavy debts. The mortgages often charge higher interest rates to compensate for the greater risk of default.

Among last year's 20 largest sub-prime lenders ranked by Inside Mortgage Finance, more than half have been sold or left the business.

Foreclosures set a record in the second quarter, and overdue payments on U.S. sub-prime home loans rose to the highest level in five years, according to the Mortgage Bankers Assn. That has made investors reluctant to buy mortgages, and bankers have cut off credit lines to home lenders.

The Federal Reserve's cut in benchmark interest rates Tuesday isn't enough to make the business profitable, Howlett said.

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