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Clear Channel Communications (CCU)
Is Private Equity Going to Pull the Plug on Clear Channel?
The Clear Channel buyout saga refuses to go away. The deal to take the largest radio station operator in the country private was originally announced in November 2006 and it called for the two private equity firms, Thomas H. Lee Partners and Bain Capital to pay $37.60 a share in a transaction worth $18.7 billion. The deal has been revised on numerous occasions and the latest price which was agreed on, in May 2007, is $39.20 (the increased price was aimed at assuaging shareholder concerns). However, as has been well documented, the credit markets have cratered since May of last year and understandably, private equity is hesitant to put up close to $20 billion for a whole bunch of broadcast radio stations (a sector that continues to lose ad dollars and listeners). So the whole buyout has been an 'on again- off again' deal, leading to huge gyrations in Clear Channel's stock price. But how does this story end and can investors make a handsome profit before the curtain finally closes?
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As buyout shops, and financial institutions that fund these deals have been brought back to the ground over the last six months, after living the good life for years amid cheap and ample credit, they have come to the realization that the days of announcing a new large-scale private equity buyout every Monday morning, are gone, for a good while least. So forget new deals, but what about the existing ones that haven't closed yet? They look a lot less compelling once the rose-tinted glasses are taken off. That of course is unfortunate for shareholders in these companies who thought they were getting bought out at a nice premium. Harman Industries (HAR: Charts, News, Offers), United Rentals (URI: Charts, News, Offers) and Sallie Mae (SLM: Charts, News, Offers) are recent examples of failed buyout deals.
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The question is will Clear Channel be the next casualty? There has been numerous reports over the last few months, some confirming that that wheels are in motion and the transaction is expected to close soon and some implying buyer's remorse, either among the private equity firms or the consortium of banks financing the deal (in this case, that includes Morgan Stanley, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and Citigroup). This has lead to wild gyrations in the stock (e.g. 8-12%), which tends to approach the $39.20 buyout level on positive news cycles and retreats on negative ones. The current pessimism arises from reports that confusion over the state of the deal (which is supposed to close in Q1 of 2008) is rising among tensions between the private equity firms and the banks. Both parties are blaming each other for being reluctant to pull the trigger. The stock hit a low of $31.52 yesterday, close to 19% off the buyout price, it has rebounded a bit today and is currently trading at $33.22, which is still way off that $39.20 deal price.
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A key phase known as the 'marketing period' (i.e. a period during which bankers focus on selling the debt to investors) ends sometime next week, after which Clear Channel can sue the private equity firms and the banks to force them to close on the deal. It is anybody's guess as to whether this situation will turn hostile or not, and of course, a correct guess could lead to a neat profit while trading the stock (because it should get pushed down atleast to the late 20's, where it was trading before any buyout talk surfaced , if the deal falls through and of course will rise to $39.20 if it gets done). Having said that, one has to like the odds of the buyout consortium walking away. It would be cheaper, especially for the banks, to pay the breakup fee (estimated to be around $300 million - $500 million) than take on $20 billion of LBO debt on their balance sheets which, by most estimates, they would have to write down at least 15% immediately as they mark it to market in this tough credit environment. The balance sheets of some of these banks (especially Citigroup) have been hit hard over the last couple of quarters making it even tougher for them to shell out the money. As far as the private equity firms are concerned, there is a good chance they have realized that they agreed to pay too much and making a radio business work nowadays is a little too hard.
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