By Megan Davies 1 hour, 23 minutes ago
NEW YORK (Reuters) -
The $20 billion leveraged buyout of
U.S. radio operator Clear Channel Communications Inc was in
jeopardy on Tuesday, with banks increasingly reluctant to
provide financing, a source familiar with the situation said.
The banks appear unwilling to account for any losses on the
loans they agreed to make for the deal, the source said. But
the final resolution is unclear, with the private equity buyers
still wanting to do a deal, the source added.
If the Clear Channel deal falls apart, it would be the
latest in a series of leveraged buyouts (LBOs) that have failed
since the credit crisis began last year. It would leave a
handful on the table still, such as the $6.1 billion buyout of
Penn National Gaming Inc and the $34.1 billion buyout of
Canada's biggest telecom company BCE Inc.
Clear Channel struck the deal last year to be bought by
private equity firms Thomas H. Lee Partners and Bain Capital
Partners LLC for $39.20 a share. But the market has changed
since then and its stock has for months traded significantly
below the offer price amid concerns about the deal.
Its shares fell 21 percent to $25.70 after-hours on Tuesday
after falling 5.6 percent in the regular session on the New
York Stock Exchange, a sign traders felt the deal was doomed.
"If it fell apart, it would be seen as a casualty of the
credit crunch as well as the secular and cyclical challenges of
the radio industry," said David Bank, analyst with RBC.
Banks that agreed to finance the deal are Citigroup Inc,
Morgan Stanley, Deutsche Bank AG, Credit Suisse Group, Wachovia
Corp, and Royal Bank of Scotland Group Plc .
Danielle Romero-Apsilos, a spokeswoman for Citigroup,
declined to comment. Spokespeople from Credit Suisse, Deutsche
Bank, Morgan Stanley and Wachovia referred questions to
Citigroup. Royal Bank of Scotland Group was not immediately
available for comment.
A spokeswoman for Clear Channel said the company had no
immediate comment. The company has previously said it expects
the deal to close by March 31.
If the deal does fall apart, it could follow others such as
United Rentals into litigation.
"A lot has changed since this deal was announced," said
Hillary Sale, professor of corporate finance and law at the
University of Iowa College of Law. "Someone's going to have to
pay breakup fees, and the question is, whether it's just
private equity firms, or whether the banks are on the hook....
It depends on the nature of the agreements with the banks."
The original agreement said that the buyers would pay Clear
Channel a breakup fee of $500 million if the deal falls apart
due to a "willful and material breach."
Since the deal was originally announced average loan prices
have contracted significantly. In other recent LBO financings,
such as the buyout of Harrah's Entertainment, the loans were
sold at a significant discount and the cost of this was mostly
borne by the banks.
Banks have to record decreases in the market value of loans
in their income statements in a process known as "marking to
market." Any declines in the market value of these loans could
cut into bank earnings and, in the worst case scenario, cut
into capital levels.
Banks are increasingly reluctant to take on credit risk
because their balance sheets are strained by subprime
mortgages, collateralized debt obligations and other forms of
debt that are performing much worse than expected.
The financing package backing Clear Channel's buyout
consists of $18.525 billion in senior secured bank debt and
$2.6 billion of new senior unsecured debt.
The battle for Clear Channel had numerous twists since the
company announced in October 2006 that it had hired Goldman
Sachs Group Inc to help it evaluate alternatives.
to buy the company for $37.60 a share. But their bid ran into
trouble when some said it undervalued the company. The buyout
firms raised the bid to $39 a share and later $39.20 a share.
The deal still faced a tough shareholder vote hurdle under
Texas law but in September, they approved the bid and in
February it passed regulatory approvals.
(Additional reporting by Dan Wilchins, Sue Zeidler, Faris
Khan, Doris Frankel and Michele Gershberg; Editing by Andre
Grenon and Carol Bishopric)
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