Accredited Home Lenders Holding Co shares rose 43 percent on Friday after Lone Star Funds said it was prepared to buy the subprime mortgage lender at a lower price than it previously agreed to pay.
Accredited rejected the private equity firm's revised $8.50 per share bid, which valued it at about $214 million, saying it was not in shareholders' best interest.
The struggling San Diego-based company said it will instead pursue its Delaware Chancery Court lawsuit seeking to enforce Lone Star's June 4 agreement to pay $15.10 per share, valuing Accredited at the time at about $400 million.
Nothing we have seen to date has altered our perception of the strength of our case, Chief Executive James Konrath said in a statement.
Lone Star spokesman Ed Trissel did not immediately return a call seeking comment.
Dallas-based Lone Star's $8.50 per share offer, disclosed late Thursday, was 34.7 percent higher than Accredited's closing price that day. It eased investor fears the acquisition might fall apart, threatening Accredited's survival.
Subprime lenders make loans to people with poor credit. Dozens have quit the industry or gone bankrupt this year after defaults rose and investors stopped buying home loans they made, forcing them to either lend less or absorb losses.
Lone Star announced its revised offer eight days after Accredited said it would lay off 1,600 of its 2,600 workers and shut most of its lending business, which originated $15.8 billion of home loans last year.
Prior to Thursday, Lone Star had sought to back out of the merger, citing a drastic deterioration in Accredited's business. That triggered Accredited's August 11 lawsuit.
The fact Lone Star sees value suggests the market may be getting more rational, said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP in New York. The value may have been there even two or three weeks ago, but no one was willing to recognize it.
Investors have been growing more optimistic that federal regulators will not let housing-related credit problems unduly damage the economy.
Still, Lone Star Vice President Marc Lipshy urged Accredited in an August 30 letter to accept the lowered offer because under current conditions the company may suffer further declines in value and have a difficult time surviving as a going concern.
Accredited shares closed on the Nasdaq up $2.74 at $9.05, above the new offer price. Fitzsimmons said this may mean investors believe the company could see higher offer, perhaps from a new bidder.
Victoria Console and Rick Howe, spokespersons for Accredited, did not return requests for comment on Friday.
Lone Star joined Cerberus Capital Management LP among private equity firms seeking new terms for subprime lender acquisitions.
On Thursday, tax preparer H&R Block Inc (HRB.N: Quote, Profile, Research) said it reopened talks on the sale of its money-losing Option One Mortgage Corp subprime unit to Cerberus.
Chief Executive Mark Ernst said H&R Block may close Option One's lending business and sell Cerberus just the loan servicing business, which he said remained quite valuable.
(Additional reporting by Mark McSherry)