Reddy Ice Deal Melting Away?

The market's recently cooling credit markets may have now led to another buyout victim: Reddy Ice (NYSE: FRZ). The company, which had agreed to be bought out by GSO Capital for $1.1 billion, is now wondering whether the deal's lender, Morgan Stanley (NYSE: MS), is heading for the exits.

With an impressive client list and strong cash flows, Reddy Ice, the largest manufacturer and distributor of packaged ice in the U.S., seemed like a logical buyout candidate. But the company's recent weak results, coupled with the tightening credit markets, led GSO to renegotiate parts of the transaction. The adjustments included a 50% reduction in the termination fee to $3.5 million, limits on the payment of dividends, and an extension of the marketing period for raising the debt.

Such changes should not be dealbreakers; if anything, they should help facilitate the deal. But that's not the thinking at Morgan Stanley, which is on the hook for $775 million in financing. Morgan Stanley says that the changes required its consent, which could let the investment banker rescind its obligations.

Such jitters from lenders are far from an aberration. Just look at Home Depot's (NYSE: HD) sale of its supply unit. To get the deal done, the home improvement giant agreed to a $1.8 billion haircut on the transaction.

While the buyout offer for Reddy Ice is $31.25, the current stock price is around $26.65. Based on the discount, it's clear that the market expects either that the deal will not close, or that that there will be a renegotiation on price and/or terms. But for Foolish investors, it doesn't look like there's much upside on this one.

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