A Moment of Clarity in Clear Channel Mess

Despite Blame Game Between Private Equity Firms and Banks, Wall Streeters Say Neither Really Wants Deal Done

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NEW YORK (AdAge.com) -- In the landscape of buyout deals agreed to but not yet completed, Clear Channel Communications was one of the more likely to collapse, according to a report in Financial Week. The market's expectations were borne out last week when Thomas H. Lee Partners and Bain Capital filed two lawsuits against the six banks that had agreed to finance their $19.5 billion purchase of the country's largest radio broadcaster for failing to honor their commitments.

"We want to do this deal," Thomas H. Lee Partners and Bain Capital said in a joint statement March 26. "We are ready to close, have funded the equity portion of the purchase consideration, maintain our enthusiasm for the investment, and are fully prepared to fulfill our contractual obligation to complete the deal."

Deteriorating ad revenue
Sounds convincing enough. Yet many on Wall Street believe that the two big private equity firms aren't any more eager to close the deal than the banks that are on the hook for more than $22 billion in loans. After all, Clear Channel's advertising revenues have seriously deteriorated since the buyout terms were signed last May, and the $39 per share price tag on the deal is looking high considering the state of the economy.

Nevertheless, with e-mail evidence from a Credit Suisse banker reportedly suggesting the Citigroup-led banking group was trying to determine how to get out of the deal as early as last summer, the banks make for a good scapegoat -- especially if the private equity guys are looking for one to share the financial pain of a busted deal.

Thomas H. Lee, Bain and Clear Channel claim the six banks are attempting to get out of their earlier financing commitments, citing "poison provisions" they say the bank group inserted in the final loan documentation that effectively attempt to replace long-term financing with a short-term bridge loan.

'Simple case of lenders' remorse'
"These terms can only have been designed ultimately to kill the deal," charged the complaint filed in the New York State Supreme Court. "Despite having made a commitment that was not subject to any market conditionality, the banks have balked at their obligations due to a simple case of lenders' remorse."

There is much to be remorseful about. Citigroup, Deutsche Bank and Morgan Stanley are responsible for more than $4.1 billion in total financing, and Credit Suisse, Royal Bank of Scotland and Wachovia are in for $3.2 billion each. In total, the banks claim they'd take an immediate loss of more than $2.6 billion on the loans, based on the market's current 15% discount for leveraged loans.

The banks could, of course, hold the loans on their balance sheets and hope the market improves, but with many of them starved for capital, that prospect isn't attractive. The reported termination fee of $500 million for which the private equity firms would be liable looks a lot easier to swallow.

The breach of contract claim in New York is one thing, but the tortious interference claim in Texas, joined by San Antonio-based Clear Channel, presents the banks with a whole other level of risk. "The financial risk to the banks in this suit dwarfs any risk they think they have in funding the debt," Clear Channel CEO Mark Mays told reporters last week.

To hammer his point, Mr. Mays has hired the irascible Houston-based lawyer Joe Jamail. Recall that Mr. Jamail won $10.5 billion in damages from Texaco for interfering with his client Pennzoil's acquisition of Getty Oil in 1985. The award was later negotiated down to $3 billion. "You don't want to play in the other guy's home court," said Joe Bartlett, a lawyer with Chicago-based law firm Sonnenschein.

Could lead to windfall in damages
Particularly if that home court is in Texas. Bexar County Judge John Gabriel has already slapped a restraining order on the banks to stop them from sabotaging the merger agreement, which expires June 12. While that order doesn't yet compel the banks to finance the deal according to the original terms, the Texas claim ups the ante for the banks. "The beauty of a claim like this is that if it gets past dismissal, it creates the potential for huge damages," said another lawyer. Indeed, Clear Channel is asking for $26 billion in damages.

For their part, the banks insist they're ready to do the deal. "The bank group presented the sponsors with credit agreements fully consistent and compliant with the commitment letter," said a statement released by Citigroup spokeswoman Danielle Romero-Apsilos. "We believe the suits are without merit and will contest them vigorously."

Whether the banks determine they stand to lose less if they settle or complete the deal remains to be seen. "The lesson of course is the devil is in the details," said Mr. Bartlett. "The lawyers should be doing more work to specify contingencies and price them into deals at the beginning, to avoid throwing money down the rat hole in litigation."

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Andrew Osterland is a reporter for Crain Communications' Financial Week covering accounting, compliance and risk management.
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