• by Erik Sass , March 27, 2008

Thomas H. Lee Partners and Bain Capital Partners are suing a syndicate of six banks after they refused to honor an earlier agreement to finance the private equity companies' planned $19.5 billion buyout of Clear Channel Communications. The private equity firms filed two lawsuits, one in New York, the other in Texas, where the company is based.

The New York lawsuit alleges breach of contract, and seeks to "enforce a binding commitment" by the banks to provide financing for the deal, according to the 44-page complaint filed with the New York State Supreme Court, while the Texas suit (filed with Clear Channel's participation in Bexar County) alleges "tortious interference" and seeks damages from the banks for trying to block the deal.

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.--backed out of the deal because they feel it overvalues the company substantially at its current stock price. The private equity firms are offering $39.20 per share, a roughly 45% premium over the closing price of $26.92 on Wednesday.

As global credit markets grow tighter and tighter, the banks are afraid they won't be able to repackage the debt for sale to other financial institutions, and they're leery of holding the debt themselves when the radio business is seeing revenues decline, with an economic recession on the horizon. For the same reasons, the buyers would find it very difficult to line up financing from other banks on terms nearly as favorable as those agreed with the six bank syndicate in 2006, in a more favorable economic climate. 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 conceded in a memo to employees that "No one anticipated how challenging Q1 would be for us."

The breach of contract complaint filed by Lee and Bain in New York notes that the banks agreed to finance the deal in a commitment letter first signed in November 2006 and later amended in May 2007. This commitment letter, the complaint goes on, "set forth the material terms of the debt financing in detail," leaving only relatively minor details to be negotiated later.

However, the banks seized on these small areas of ambiguity to try to undo the deal, Lee and Bain allege, by inserting into the final documents "poison provisions" contrary to the commitment letter and the banks' statements to the firms. According to the complaint one bank, Citigroup, also threatened to disrupt the financing of an unrelated deal in September, 2007 in an attempt to coerce concessions on Clear Channel financing.

While the complaints place the blame squarely on the banks for failing to keep their end of the bargain, rumors are circulating on Wall Street that the lawsuits are actually a ruse to get the private equity firms out of their own promise to purchase the company. Indeed, the Wall Street Journal Web site quoted Mitch Walker, an attorney with Bass, Berry & Sims, as saying: "One of the ways that the buying group can argue that it has satisfied its obligations is to bring a lawsuit against the lenders. Once they satisfy that, their only obligation is to pay the termination fee, not to close the deal." By launching a court proceeding to enforce the contract in seeming good faith, the companies could fulfill their legal obligations, although they would incur a substantial $600 million breakup fee. A protracted court case could effectively torpedo the deal by running down the clock to June 12th, the date on which the private equity firms can voluntarily terminate the merger.

The Texas lawsuit alleging tortious interference by the banks accused the bankers of trying to do just that, implying continued legal liability for the bankers even if the date comes and goes. However, by taking Clear Channel's side in suing the banks, the private equity firms may be able to enjoy the same outcome without exposing themselves to continued liability--meaning a legal obligation to close the deal--after the June 12th deadline.