Dark Cloud Hangs Over Clear Channel Deal

Radio giant Clear Channel Communications warned Thursday that it cannot estimate when its planned sale to a private equity consortium may be closed.

The buyers, which include Bain Capital and other private equity firms, stand ready to close on the US$19.5 billion deal at the end of the month as planned, Clear Channel said.

However, despite a ruling Wednesday from a judge in Texas, who issued an order preventing banks from obstructing the deal, the company said banks are still not cooperating on reaching closure. The banks on Thursday filed a request to have the case relocated to the federal court in Texas. The judge scheduled a hearing on the case for April 8.

‘A Closing May Not Occur’

The banks involved in the deal “failed to attend the previously noticed meeting” held Thursday among the various parties, Clear Channel said in a filing with the Securities and Exchange Commission.

“The company continues to be ready, willing and able to consummate the merger under the merger agreement, which remains in effect,” the filing states. “The company is unable, however, to estimate a closing date at this time and cautions the markets that a closing may not occur.”

Clear Channel shares fell more than 5 percent on the latest news Friday, to $28.10. The fact that the stock price is well below the $39.20 per share that the buyers are offering likely reflects investor pessimism that the deal will be done as drafted.

Forward and Backward

Clear Channel, which owns radio stations across the U.S. as well as one of the largest outdoor billboard networks, first announced its intention to accept the private buyout at the end of 2006.

The would-be buyers include Thomas H. Lee Partners and Bain, two Boston-based private equity giants. The deal has stalled for various reasons, but most recently has been held up by the growing credit crunch.

Earlier this week, the two firms filed suit against a group of banks, including Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank and the Royal Bank of Scotland. The suit claimed that the banks were essentially blocking the deal by refusing to honor the original financing terms and attempting to renegotiate the terms under which it would bankroll the deal.

The threat of a permanent injunction from the court may help prompt a compromise settlement, said RBC Capital Markets analyst David Bank.

The problem with the deal as constructed now is that the banks are facing the prospects of immediately having to write down the value of their loans, which were written at a time when the radio and outdoor ad network were valued higher, Bank told the E-Commerce Times.

Even though Bain and Lee have said publicly that they still want to close the deal and believe they can free significant value from the company, the right exit strategy may be welcome to all. “It’s just figuring out the details,” he added.

On the Shelf

The stakes are high for Clear Channel and the other players. If the deal does not go forward, Bain and Lee are on the hook for a $600 million breakup fee, which they may seek to have the banks pay if the deal does collapse.

The banks could face billions worth of write-downs — the sagging economy has dented Clear Channel’s value significantly, making it worth far less than the original $39 per share price — and Clear Channel could face suits from shareholders if they sale doesn’t go through.

Meanwhile, a collapse in the deal would be a reminder of the depth of the credit crisis brought on mainly by turmoil in the subprime mortgage sector.

Merger and acquisition activity has plunged to a four-year low as a result, according to research firm Dealogic, leaving many would-be deals on the shelf and endangering many already in the works.

Though the thought of the deal failing isn’t new, the Friday filing was the first acknowledgment of that possibility to come directly from Clear Channel.

Given the March 31 closing date that was targeted recently, the latest crisis may have been sparked after the banks involved tried to find buyers for the debt on the secondary market, said Stanford Group analyst Clayton Moran.

“Buyers and sellers both want relatively short-term windows for closing a deal for this reason,” he told the E-Commerce Times.