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Apria Healthcare Group (NYSE:AHG) had been seeking strategic alternatives for a number of years before it struck its recent deal with Blackstone Group, two sources familiar with the situation told dealReporter. This comes despite the company’s board requesting a ”go-shop” period that ends on 24 July to seek out a higher bid.

Prior to the announcement, Blackstone had looked at the company through various ”processes,” the first source said. He said Apria did not run a broad auction but had targeted strategics and private equity parties alike, obviously including Blackstone.

”The company had been on the block for a number of years and everyone knew it,” the source said. ”[Apria] probably didn’t need a go-shop in terms of satisfying the board’s fiduciary duties but it was nice to have in light of the fact that it was a fairly targeted auction,” he added. The source’s comments come on the heels of shareholder litigation against Apria, claiming management breached its fiduciary duty by selling the company at depreciated valuations.

The source responded that there should be no material impact as a result of the shareholder lawsuits, and characterized these moves as ”ordinary course.”

The source said he believed that once the definitive proxy is approved by the Securities and Exchange Commission, the shareholder meeting and closing of the deal could come either late September or October.

As part of the USD 1.6bn take-private, the terms negotiated allow the lenders, including Bank of America, Wachovia and Barclays Capital, much more flexibility than other recent leveraged buyouts, said the second source. Although both debt and equity have been committed by the banks and the sponsor, the first source characterized Apria’s take-private as a “true option” deal, by which the company cannot specifically enforce the obligation to close.

”The [buyers] have the ability to either close it or if they decide not to close it, pay a reverse termination fee,” the first source said.

The termination fee in the event that the company terminates the transaction namely due to a rival bid, is USD 28.4m, while the reverse termination fee is USD 37.9m, approximately 3.1% and 4.1% of equity value, respectively.

There are no financing conditions to the extent that the buyer is unable to receive the financing and decides not to close, commented the first source. In addition, there is a provision under the merger document that specifies that the seller is not entitled to a specific performance.

”It is a ’true option’, which means we could have satisfied all the conditions to closing and they can simply say, ’we are going to abandon this deal, we are not going to close it.’ In that circumstance they have to pay a reverse termination fee,” the source said.

These types of terms are what private equity are demanding right now following a string of failed recent LBOs, the source said. He noted Blackstone’s unsuccessful acquisition of Alliance Data Systems earlier this year and United Rentals (URI), whose deal with Cerberus Capital Management collapsed in November.

In this case, the reverse termination fee is higher than what Blackstone has traditionally agreed upon in the past. The first source said he believed this trend would ensue for true option deals.

”The reverse termination fee was a much negotiated term, meaning [Blackstone] just said that at 4%, that was as high as they were willing to go,” the source explained. Meanwhile, the termination fee is very much in line with other similar transactions – two tiered termination structure at around 2% to 3% equity value.

Blackstone’s liability in the event of a cancelled deal is limited to only the reverse breakup fee. Furthermore, the company is not allowed to seek equitable relief, equitable remedies, or anything similar through the court.

The deal will also require regulatory approvals under Hart-Scott-Rodino. Blackstone has assumed the risk of all other regulatory filings, which the source said is critical for healthcare targets particularly due to state regulatory approvals. Again, the source explained if the parties do not receive approvals from a key state or pharmacy board, the buyers have the option of not closing.

The first and second source concurred that in light of Blackstone’s portfolio, they did not believe receiving clearance under HSR would be challenging and could likely expect early termination.

Apria entered into a USD 280m credit facility with Bank of America, Wachovia and Barclays, simultaneous to the transaction. USD 250m of the proceeds of the new credit facility will be used to fund potential repurchases of Apria’s 3.375% convertible senior notes due 2033 while USD 30m will pay certain tax liabilities, said the first source.

”The interesting and difficult part of this transaction was getting a facility in place that Bank of America agreed to put up in connection with the whole deal that was not solely for Blackstone but for the company,” the source said.

Therefore, if another qualified suitor were to rival Blackstone’s USD 21 per share cash offer, the facility has a carve out feature which upon a change of control or in the event of default, requires the facility to be paid out. ”So the company’s view was if the convert got put, and the deal hadn’t closed, Apria wanted to make sure they could finance the convert,” said the second source.

The put right in those converts allow holders to put to the company and receive all cash for the convertible notes. Because the convertibles notes are currently under water, and will unlikely ever reach the conversion price of USD 34.86, the company anticipates 100% of the holders will put to the company, the source said. Apria’s shares closed Tuesday at USD 19.39.

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