Clear Channel Buyout: Not So Clear

by Erik Sass, Mar 26, 2008, 8:01 AM

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One of the largest private equity buyouts ever of a major media company appears to be in jeopardy, as Clear Channel Communications' suitors, Thomas H. Lee Partners and Bain Capital Partners, find it increasingly difficult to raise the money needed for the acquisition. The failure of a $19.5 billion deal, first reported on the Wall Street Journal Web site late Tuesday, would undo 15 months of planning and negotiation.

An unnamed source cited by the paper, said the private equity firms remain committed to the buyout, scheduled to close March 31st, but the banks tapped to lend the money -- Citigroup Inc., Morgan Stanley, Deutsche Bank AG, Credit Suisse Group, Royal Bank of Scotland Group and Wachovia Corp. -- feel it overvalues the company substantially at its current stock price. The private equity firms are offering $39.20 per share, a 20% premium over Tuesday's closing price of $32.56 and almost 52% premium over the after-hours trading price of $25.82.

The banks would pay a high price for refusing to honor agreements to finance the deal, including expensive lawsuits and considerable damage to their reputations. The fact that they may still walk away suggests very deep reservations about financing the buyout, as credit markets tighten in the wake of the sub-prime mortgage meltdown.

Their worries are compounded by the fact that the radio business seems to be suffering a secular downturn amid general fears of an economic recession. Clear Channel Radio, the largest radio group in the United States, said revenues fell 3% in the fourth quarter of 2007 compared to the same period in 2006, to $874.6 million, and in late January CEO John Hogan ordered a freeze on new hires and cut out research and ad spending entirely for the remainder of the first quarter, effective Feb.1. In a memo to employees explaining the freeze, Hogan conceded that, "No one anticipated how challenging Q1 would be for us," suggesting more bad news may be on the way.

The bankers might not be the only ones getting cold feet. For months, rumors have circulated on Wall Street that the private equity companies themselves wanted to walk away from the deal. According to a separate report in the New York Times on Tuesday, the six-bank syndicate recently demanded stricter terms for the giant loan, but Lee and Bain refused, lobbing the ball (and financial burden) back into their court.

The failure of the deal due to the company's low stock price would not be without irony, coming after long delays caused by investors who demanded higher prices from the private equity companies for the buyout. In November 2006 Lee and Bain first offered $37.60 a share, a roughly 25% premium over the previous six months, when the stock had gyrated between $28 and $32 a share. Protracted negotiations to raise the share price delayed shareholder approval by ten months, to September 2007.

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