• by Erik Sass  @eriksass1, March 5, 2007

In a letter to shareholders in Clear Channel Communications released on Friday, board representatives Alan D. Feld and Perry J. Lewis urged them to approve the board's proposed sale of Clear Channel to two private equity groups: Bain Capital Partners and Thomas H. Lee Partners. Pointing out the premium each shareholder will earn on the sale of stock, the letter emphasized that the auction was "highly competitive" and the decisions of the directors were "disinterested."

Nonetheless, as the strident tone of the letter hints--for example, the bold, all-caps exclamation that "WE URGE YOU TO VOTE FOR THE PROPOSED MERGER TODAY!"--Clear Channel's corporate controllers still face some opposition from skeptical shareholders.

The proposed buyout would value the stocks at $37.60 per share. L. Lowry Mays, the founder and chairman of CCC, would sell a large number of shares in the transaction.

Although the price represents a 28% premium over the average share price over the last 60 days, the company has faced dissent from shareholders who believe that's too low. In its argument for the deal, Clear Channel acknowledged the other strategies proposed by shareholders to increase share value: "During their review, the disinterested directors considered a full range of alternatives other than the sale of the Company, including a sale or spin-off of Clear Channel Outdoor, a recapitalization, share repurchase and special dividend, as well as remaining as an independent company."

The proposed sale or spin-off of Clear Channel Outdoor received special consideration in the letter. Although the division posted 9% revenue growth during full year 2006 compared to 2005, topping $2.9 billion, expenses also increased substantially because of foreign currency and market conditions. Clear Channel corporate executives have previously attributed Outdoor's weak International results to antiquated European market controls, and some shareholders may still have a bitter taste in their mouths from the European division's expensive restructuring of its French operations in 2005.

Clear Channel Outdoor's International operations are indeed seeing the biggest rise in expenses in 2006 compared to 2005. Of a total 12% increase--about $60 million--for the outdoor division, $33 million in new expenses came from the company's International operations, compared to $27 million for the U.S. division. International expenses now stand at about $338 million or 60% of the total, compared to $207 million or 40% of the total for the U.S. These totals compare unfavorably with revenue returns, in which the U.S. brought in 45% of total revenue and International brought in 55%, together netting $831 million.

The dissident shareholders may also find reason for hope in some of the company's previous strategic moves. In years past, the parent company has not hesitated to push unprofitable divisions from the nest, as with its 2005 spinoff of Clear Channel Entertainment. More recently, Clear Channel Radio announced its intention to sell about 400 stations in smaller markets, slimming its national network to 900.

Nonetheless, the board wants to stick with Outdoor at least for now, urging shareholders to approve a plan in which Clear Channel Communications will be acquired whole. Overall, outdoor advertising is one of the few traditional media to enjoy robust growth in recent years. Industry revenue grew 6% in 2003 compared to $5.5 billion in 2002; 5% to $5.8 billion in 2004; 8% to $6.3 billion in 2005; and a further 8% to $6.8 billion in 2006.

In the case of Clear Channel Outdoor specifically, many of its recent expenses are associated with the rollout of digital signage systems that promise to be cash cows if they clear local government hurdles. It's also worth noting that expenses at the American division are actually rising faster on a percentage basis--15% versus Europe's 11%.