Clear Channel: Now It's Up to the Shareholders... Again

Clear Channel Communications has settled with the banks that are supposed to fund its buyout by two private-equity firms. The settlement averts trials in New York and Texas, where Clear Channel and its intended buyers, Thomas H. Lee Partners and Bain Capital Partners, had filed two lawsuits against the banks--one to force them to fund the deal as originally promised, and the other seeking damages for "tortious interference."

But the settlement agreement lowers the buyout price from $39.20 to $36 per share (about 8%). That means the deal has to go back to Clear Channel shareholders for approval--reopening the seemingly endless haggling that delayed the deal for nine months in the first place.

The settlement would substantially lessen the burden of financial risk on the consortium of lenders, which includes Citigroup, Deutsche Bank, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Wachovia. When the consortium agreed to lend the private-equity firms almost $20 billion for the buyout in May 2007, the global credit crunch was just beginning to unfold. Since then, the six-member consortium got cold feet about the high price of the Clear Channel buyout.

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The banks also had second thoughts because of the recent weakness of the radio business in general, including Clear Channel Radio. During the three quarters following the final buyout agreement, in year-over-year comparisons, Clear Channel revenues fell 1% in July-September, were flat at 0% in October-December, and then fell 4% in January-March.

The radio business overall fell 5%, 4%, and around 5% in the same periods. (Figures for the first quarter are not yet available.)

Clear Channel sued the banks in later March for allegedly inserting "poison" provisions intended to derail the funding agreement at the last minute. While they took Clear Channel's side in the lawsuits against the banks, Thomas H. Lee Partners and Bain Capital Partners are doubtless relieved with the outcome, but have come to regret the high price tag. In fact, some Wall Street analysts speculated that they welcomed the trial, using it as an elaborate legal subterfuge that would allow them to escape the deal if they could not get the price lowered.

Now that the three sides have settled on a lower price, they must get approval from Clear Channel's shareholders, including individual and institutional shareholders who proved intractable during the first round of negotiations. They will take the price reduction as a bitter pill, considering that the private-equity firms originally offered $37.60 per share when the deal was first announced in November 2006--a bid rejected by shareholders as too low.

Seven months of negotiation raised the price about 4% to $39.20, by which time economic malaise was beginning to set in. The new, lower offer must be especially galling, considering that some shareholders bought the stock at almost $100 per share in the years before 2001.

If they accept the new offer, Clear Channel shareholders also have the option of exchanging their current shares for shares of the new, privately owned company, called CC Media Holdings. Up to 30% of the shares may be exchanged. The special shareholder meeting has not been scheduled yet.

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