Inside The Deals: Texas Justice May Give Clear Channel Another Shot
This story was written by Steve Rosenbush.
A rough bit of Texas justice may well give the imperiled $19.5 billion Clear Channel (NYSE: CCU) buyout another shot at life. A state judge ruled on March 26 that the six banks that agreed to finance the deal must honor their commitment, even though they stand to lose billions of dollars on the transaction. There's an important lesson in the ruling, too. At a time when central banks around the world are softening the blows of the credit market meltdown for institutions such as Northern Rock and and the JP MorganChase bailout of Bear Stears, the Texas court is upholding the concept of moral hazard. That concept holds that financial bailouts make investors complacent and thereby increase the probability of more reckless investment in the future.
Clear Channel's victory was due to the work of attorney Joe Jamail. He's the guy who represented the radio and billboard company and its prospective buyers, private equity firms Bain Capital and Thomas H. Lee Partners LLC. On Wednesday, he convinced Texas state court Judge John D. Gabriel in San Antonioliterally Clear Channel's home courtto issue a temporary restraining order that says the banks can't scuttle the deal, even though they stand to lose at least $3 billion after it closes. The banks don't want to hold the debt on their balance sheet, and they will be forced to sell it at a huge discount because the credit market has deteriorated sharply since the deal was first announced. More in the extended entry
The temporary restraining order was unusually strong medicine, according to Professor John Coffee of Columbia Law School. Most restraining orders simply tell one party to halt certain behavior. This one goes further, because it compels the banks to take affirmative action and turn their loan commitment letter into a final agreement. A federal court wouldn't have taken such a step, he said. "Texas judges are fast on the draw. This is the world of Judge Roy Bean. But it means something. Clear Channel has more leverage than it did before," Coffee said.
The banks may stand to lose more than $3 billion if the case goes to trial. The odds of such a loss may be small, but they are real. Another drama that played out in San Antonio underscores that possibility. Jamail won an historic ruling in 1984 on behalf of Pennzoil, now part of Royal Dutch/Shell. Pennzoil had an agreement to buy Getty (NYSE: GYI) Oil, but Texaco broke it up. Pennzoil filed suit in San Antonio. The Texas court ruled in Pennzoil's favor, and forced Texaco to pay $7.5 billion in compensation and $3 billion in damages, later reduced to $1 billion. Coffee said the memory of that case might convince Clear Channel, its buyers and the buyers' banks that negotiation is worth another shot.
The banks and the private equity buyers clearly misjudged when they agreed to the terms of the Clear Channel buyout. "Fundamentally, the price was way too high," says Ken Marlin, managing partner of media and tech investment bank Marlin & Associates. The price of Clear Channel stock has dropped from $39 last year to $29 today. Lehman Brothers analyst Anthony J. DiClemente said on Wednesday that Clear Channel shares have a fair value of just $20.
Of course, there's no guarantee that the deal will be saved. "No court can force a company to spend money it doesn't want to spend and do a deal the market will not support," says Phillip Phan, professor of management at the Lally School of Management and Technology, Rensselaer Polytechnic Institute. But the banks won't be allowed to just pick up and walk away, either. That's going to make them much more cautious in the future. If the richly priced and highly leveraged Clear Channel deal does close, it will be the last buyout of its kind for a very, very long time.
Welcome to the third edition of Inside The Deals, a weekly column about M&A in the media written by vetern business journalist Steve Rosenbush. Steve is based in New York, and previously was the finance writer for BusinessWeek.com, responsible for coverage of M&A. His interests include the evolving business of media. He can be reached at steve AT paidcontent.org.
By Steve Rosenbush