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Cerberus, Chatham cancel $1.1b deal to buy 64 hotels

Cite risk with Innkeepers

By Cristina Alesci and Jason Kelly
Bloomberg News / August 23, 2011

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NEW YORK - Cerberus Capital Management LP and Chatham Lodging Trust have terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers USA Trust, a sign the weakening economy is straining the private-equity market.

Yesterday, the firms cited a possible adverse change in Innkeepers’ business as the reason for backing out of the June transaction, a key element in the lodging company’s plan to exit bankruptcy.

Cerberus, the New York buyout firm, and Chatham, a publicly traded hotel investor in Palm Beach, Fla., did not specify what triggered the decision.

“For private-equity investors, and more importantly for lenders, there’s a basic retrenchment, with the thought that maybe we need to step back a little and slow down major acquisitions and see whether the economic forecasts are realistic,’’ said David Loeb, a hotel analyst at Robert W. Baird & Co.

Cerberus owns the Boston-based Steward Health Care System, which it created to run Caritas Christi Health Care, the hospital chain it purchased last year. Cerberus converted the nonprofit Catholic hospitals to for-profit operations.

Prices on leveraged loans, the backbone of the buyout business, have been falling. The decision on Innkeepers indicates deals may be more expensive to finance.

Cerberus has abandoned deals before. It walked away from its $4 billion agreement to buy Greenwich, Conn.-based United Rentals Inc. in 2007. The company unsuccessfully sued Cerberus to complete the purchase, and Cerberus ultimately agreed to pay a $100 million breakup fee.

Innkeepers owns hotels in 20 states and the District of Columbia, including Residence Inns by Marriott and Hampton Inns. Such midscale properties outside major cities have been slower to recover than big-city hotels.

“That’s a trend that’s been there, and the concern is that in a recession there could still be some travel to major markets but there’ll be less reason to go into these secondary markets,’’ Loeb said.

The collapse of the sale disrupts Innkeepers’ exit from Chapter 11 protection.

In May, Cerberus and Chatham Lodging placed the winning bid for the largest group of Innkeepers’ hotels, topping an offer from a unit of Lehman Brothers Holdings and Five Mile Capital Partners. On July 14, Chatham completed the acquisition of five hotels with 764 rooms from Innkeepers for $195 million, a deal not affected by yesterday’s decision.