Clear Channel Takeover On the Verge of Collapse

By Jason Simpkins

What would have been one of the biggest acquisitions of the now moldering corporate buyout boom looks to be unraveling as banks, suffering from a drought of liquidity, balk on financing the transaction.

Clear Channel Communications (CCU) dropped 16% yesterday after the Wall Street Journal reported the planned takeover of the company by Thomas H. Lee Partners LP and Bain Capital LLC might fall through.

"Right now, there is no credit agreement. And without a credit agreement, we have no deal," the Journal cited a source close to the deal as saying.

Banks such as Citigroup Inc. (C), Morgan Stanley (MS), Deutsche Bank AG (DB), Credit Suisse Group (CS), Royal Bank of Scotland Group PLC (RBS), and Wachovia Corp. (WB) originally agreed to finance the $19.5 billion deal at $39.20 a share in 2006. But those banks stand to lose about $3 billion on the transaction because since then loan prices have tumbled.

"Private equity refused to bend on price from $39.20 and the lending syndicate isn’t convinced Clear Channel will generate enough cash flow to cover the debt," David Miller, an analyst with SMH Capital in Los Angeles, told Bloomberg. "Radio values have compressed. This deal looks a lot more expensive now."

Clear Channel, America’s largest radio broadcaster, looked to be a solid acquisition when the deal was first struck in November 2006. The company’s radio revenue rose 7% in the final quarter of 2006, and 3% in the first quarter of 2007. Outdoor advertising revenue rose 13% in the last quarter of 2006 and 15% in the first quarter of 2007.

The original deal priced shares at $37.60 a share, but shareholders who considered that price too low convinced Lee Partners and Bain to raise their offer. After that, the deal began to sour. Growth in the company’s radio operations began to dwindle, and share prices dropped significantly.

Now, a dearth of liquidity has made it nearly impossible for banks to limit their risk by selling their loans to investors. The financiers of this deal have demanded more cash upfront and stricter payment terms, but the buyers have refused, leading to a standoff.

The banks are at risk legally, and may have to pay a "breakup fee" if Thomas H. Lee Partners and Bain Capital are forced to pull out of the deal. That fee could be as much as $600 million, but that would be substantially less than the $3 billion the banks stand to lose by actually going through with the deal.

"It’s cheaper for the banks to pay breakup fees and get the loan off their books than try to syndicate these loans at 95 to 85 cents on the dollar," Mark Patterson chairman and cofounder of MatlinPatterson Global Advisers LLC, told Bloomberg.

Both parties involved have stressed that a deal is still possible but sources close to the situation say that barring any last-minute settlement, the matter will likely end up in litigation.

One source told the Wall Street Journal that the negotiations have devolved into a bizarre "kabuki" dance, where both sides want to appear committed to the deal for legal purposes.

"None can be seen publicly speaking against the deal," one source told The Journal, "It’s a game of who blinks first."