This overture does not look yet like a real offer. It still looks unlikely that the offer by Buffett will be turned down by shareholders.

Cerberus Challenges Buffett

With Overture to Clayton Homes

By ROBIN SIDEL and HENNY SENDER

Staff Reporters of THE WALL STREET JOURNAL

In potentially challenging Berkshire Hathaway Inc.'s $1.7 billion pact to acquire Clayton Homes Inc., Cerberus Capital Management LP is doing what most suitors are loath to do: bid against Warren Buffett.

While Cerberus outbid Mr. Buffett's Berkshire Hathaway in another deal earlier this year, the expressed interest in buying Clayton, saying its review of public information Clayton showdown may be more challenging.

So far, Clayton is dismissing the approach made late Thursday by Cerberus, saying that the private-equity concern needs to make a formal bid. Cerberus has indicates the maker of manufactured housing may have a higher value than Berkshire's $12.50-a-share deal. But the overture was made without a specific price. Clayton's three-month-old merger pact with Berkshire Hathaway prohibits the company from talking with another suitor unless there is a bid on the table that is deemed superior to the Berkshire offer.

"We're waiting to see something more complete from the Cerberus group," said Kevin Clayton, chief executive and a member of the company's founding family. He said Clayton officials made several calls Friday to Cerberus but those calls weren't returned. Cerberus declined to comment.

The Cerberus approach has come amid growing shareholder unrest about the Berkshire Hathaway deal. A number of big investors have said that they will vote against it at a special shareholder meeting Wednesday, contending that it undervalues the company and that Clayton would be better off staying independent.

"This development further reinforces the fact that this company is worth more than $12.50 a share," says William Gray, president of Orbis Investment Management Ltd., which has lobbied other investors to vote against the deal. The Bermuda-based money management firm is Clayton's fourth-largest shareholder with a 5.3% stake in the Maryville, Tenn., company.

Founded in 1966, Clayton builds prefabricated homes, and also sells them, finances them, and insures them. It has 20 plants, company-owned stores, independent retailers, and provides mortgage services through its Vanderbilt finance subsidiary.

Cerberus must act quickly if it wants to snare Clayton: While its approach has given a boost to unhappy investors, the founding Clayton family owns about 28% of the company's shares and has vowed to vote in favor of the Berkshire Hathaway deal at Wednesday's meeting, giving the company a big leg up toward winning the majority vote needed to get the deal approved.

Still, shares of Clayton, which had been trading well above the $12.50 bid on the views shareholders might defeat the Berkshire deal, rallied further Friday because of the Cerberus approach. The stock rose more than 3% and was up 41 cents at $13.41 in 4 p.m. trading on the New York Stock Exchange.

Berkshire Hathaway couldn't be reached for comment. Mr. Buffett usually shuns bidding wars or prolonged negotiations. He refused a request from Clayton to raise his $12.50 offer before a deal was signed, Mr. Clayton has said.

Best known for acquiring the debt of distressed companies and those operating under bankruptcy protection, Cerberus clashed with Berkshire Hathaway earlier this year. In that situation, Cerberus, operating jointly with Oaktree Capital Management and Fortress Investment Group, beat out a competing offer from Mr. Buffett for control of the finance arm of Conseco Inc., which also was in the manufactured-housing business. In that case, though, Cerberus was playing on familiar turf since Conseco had filed for bankruptcy protection a few months earlier.

With Clayton, Cerberus is focusing on a well-regarded company in a struggling sector that has been battered by a severe financing crunch. As it is already in the industry, Cerberus could have a significant advantage in analyzing Clayton's capital structure, particularly the Vanderbilt business. That is especially significant because Clayton says it sees no quick recovery in the industry.

But building support among shareholders is a delicate game and requires diplomatic skills that can be very different from those involved in deciding the value of a distressed company and making offers to investors who have acquired that debt at face value and are frequently desperate to sell.

A Cerberus spokesman declined to say whether the firm has bought any Clayton shares since the Berkshire Hathaway deal was announced.

Mr. Gray of Orbis declined to comment on whether he spoke with Cerberus about Clayton, saying he didn't solicit bids but had spoken with "a lot of people" about the deal. Other unhappy large shareholders, including the California Public Employees' Retirement System, Cliffwood Partners LLC and Third Avenue Management LLC, said they haven't been in touch with Cerberus.

Write to Robin Sidel at robin.sidel@wsj.com3 and Henny Sender at henny.sender@wsj.com4