Credit Crunch Jams Deal for Clear Channel

The deal is said to be in jeopardy because the private-equity purchasers and the banks that are putting up financing can't agree to terms, The Wall Street Journal reported Wednesday. If no agreement is reached before the scheduled closing at the end of March, Clear Channel would become the largest M&A casualty of the credit crunch. None of the parties involved in the deal would comment.

Private-equity firms Bain Capital Partners and Thomas H. Lee Partners announced the buyout of the San Antonio, Texas, broadcaster in November 2006. To overcome opposition to the deal from some of the company's biggest investors, they raised their offer from $37.60 to $39.20 a share and agreed to take on $7.8 billion of Clear Channel's debt. That was before the wave of debt defaults spawned the credit crisis, cutting off the cheap financing that underwrote the 2006-07 leveraged buyout boom.

Now Bain and Thomas Lee are stuck with a price that no longer makes economic sense to a bank syndicate that includes Citigroup (C), Morgan Stanley (MS), Deutsche Bank (DB), Credit Suisse Group (CS), Royal Bank of Scotland Group (RBS) and Wachovia (WB), which agreed last April to loan $22.1 billion to complete the deal.

Clear Channel shares have oscillated wildly since talk of the deal first surfaced in October 2006, and concerns about its viability kept investors wary enough that prices never breached $39 a share. Shares peaked last June at $38.58, and had dropped 15% since then as of Tuesday's close, before news of the deal's demise spread.

"Deal is dead," SMH Capital analyst David Miller wrote Wednesday. He cut his rating on the stock to Sell from Buy.

"The market has moved too much," says Hamilton Faber, an analyst at Atlantic Equities. "From both the private-equity firms' and the banks' point of view, they don't want to do this deal, but any kind of public admission and you're open to lawsuits."

According to Radio Advertising Bureau statistics, ad revenues have sequentially declined every month for the last 12 months. Shares of rival broadcasters Emmis Communications (EMMS) and Entercom Communications (ETM) have dropped 55% and 62%, respectively, over the last year.

Insulated from market conditions by the promise of a buyout, Clear Channel shares had held up much better, dropping only 8% over 52 weeks as of Tuesday's close.

"It's a different company than [Bain and Thomas Lee] set out to buy," Faber says. "Clear Channel is 20% of the radio advertising market, and it's not going to escape that slide."

Leland Westerfield of BMO Capital Markets wrote Wednesday that while none of the parties are talking, the apparent collapse comes at the end of a 25-business-day window for marketing the deal debt.

While much could change in a short time, "the likely next steps for Clear Channel would be to seek a court remedy: to litigate for 'specific performance' to the equity buyout agreement (governed in Texas) and the lending agreements (governed in New York state)," he wrote Wednesday. "If the deal breaks, we calculate the reverse termination fee and ticking fees at $520 million to $550 million at this stage."

David Snow, U.S. editor of Private Equity International, a New York-based publication that covers private investing, says the go-go days of leveraged buyouts are gone, at least for the near term.

"In general, the credit markets have changed dramatically from the lead-up to last August, when banks were granting terms to private equity sponsors that were extremely aggressive and favorable to the borrowers. Now, those terms are not around, and the banks are wanting [buyers who still have] them to go away."

Since private-equity firms maximize their profits by putting up as little cash as possible and filling in the balance of a purchase price with the cheapest debt they can find, the finances of buyouts are carefully calibrated and hard to adjust in fast-moving markets.

"For a deal to go through, the terms need to make economic sense for both parties, and that's very difficult with these changed markets," Snow says.

While the overhang of litigation is keeping the participants mum, analysts have made their diagnoses, and Faber warns that official confirmation of the buyout's implosion will quickly expose Clear Channel's shares to the slump in the industry.

"The walk-away fee will offer a slight benefit, but I wouldn't be surprised to see further downside from this price," he said.