Update: Judge Order Keeps CC Deal Together, Banks Want Trial Moved
March 27, 2008 at 4:28 PM (PT)
A TEXAS judge's order that banks fund the proposed $19 billion buyout of CLEAR CHANNEL COMMUNICATIONS by two private-equity firms does not guarantee that the sale will go through, two analysts told REUTERS. Meanwhile, attorneys for the banks filed a suit to move the CLEAR CHANNEL lawsuit out of a state court in SAN ANTONIO and into a federal court.
The initial judge's order is described by KAYE SCHOLER LLP attorney JOEL GREENBERG as "a decision made having seen only the plaintiffs' papers ... It obviously indicates some sympathy with their case, but it's hardly a decision in the merits."
I don't think this necessarily means that the banks are going to be forced to fund the transaction today ... but it keeps the deal from falling apart for now.
The NEW YORK attorney, who isn't engaged in this litigation, also told REUTERS that the judge's order will keep things in their current state of flux until APRIL 8th, when the judge will hear from all the parties at a preliminary hearing. "It's the first step of many but one that banks would rather not have happened," he said.
That perspective was seconded by RBC CAPITAL MARKETS analyst DAVID BANK, who said, "I don't think this necessarily means that the banks are going to be forced to fund the transaction today ... but it keeps the deal from falling apart for now."
Fighting Clear Channel's Home Court Advantage
If you needed proof that the banks aren't going to succumb to the demands of CLEAR CHANNEL and the private equity buyers, TODAY they just filed suit in a TEXAS court to move the case to a federal court in the state. THE WALL STREET JOURNAL reports that legal experts expected such a request. CLEAR CHANNEL's lawsuit was filed in a state court located in SAN ANTONIO, where the radio group's corporate offices are located. The banks' request asserts that THOMAS LEE and BAIN agreed to work out any legal issues in NEW YORK, where the other lawsuit was filed, and that the TEXAS lawsuit was filed "for no purpose other than to engage in improper forum shopping."
Clear Channel's Happy ... For Now
CLEAR CHANNEL released the following statement after District Court Judge JOHN D. GABRIEL of BEXAR COUNTY, TEXAS, granted a temporary restraining order against the banks:
"We commend Presiding District Court Judge JOHN D. GABRIEL of BEXAR COUNTY, TEXAS for awarding a Temporary Restraining Order in favor of CLEAR CHANNEL WEDNESDAY evening.
Judge GABRIEL carefully considered the claims made in our lawsuit, and clearly recognized the importance of the Banks’ agreement and duty to provide debt financing to the Merger of the Company with CC MEDIA HOLDINGS, INC. He found in favor of CLEAR CHANNEL’s claim that irreparable harm would result if the Banks were not immediately enjoined from tortiously interfering with the Merger Agreement.
Accordingly, Judge GABRIEL ordered that the Banks, among other things, must not “interfere with or thwart consummation of the Merger Agreement” by 1) refusing to fund the Merger transaction, 2) insisting on terms that are inconsistent with the Commitment Letter, or 3) refusing to act in good faith in the drafting of definitive loan documents.
We are pleased that the Banks and the Purchasers will now be able to move quickly to complete the loan documents and fund the Merger."
CLEAR CHANNEL has agreed to be purchased by THOMAS H. LEE PARTNERS and BAIN CAPITAL. But lenders including CITIGROUP, MORGAN STANLEY, DEUTSCHE BANK, CREDIT SUISSE, ROYAL BANK OF SCOTLAND and WACHOVIA have declined to provide the financing that they once said they would issue.
"It seems clear that lenders' remorse set in when credit markets worsened," BAIN and THOMAS H. LEE said in a statement WEDNESDAY. "Now they are trying to walk away from their commitment letter which clearly states that they bear all the risk that conditions in the debt markets might change."
Is Breaking Up That Hard To Do?
The wild card in the current imbroglio is a breakup clause that allows either CLEAR CHANNEL or the private equity firms to walk away from the deal. "The breakup fees are $600 million and no one wants to be holding the bag," LARRY HAVERTY, who manages the GABELLI GLOBAL MULTIMEDIA TRUST FUND for GAMCO INVESTORS, told BLOOMBERG. "The leverage the private-equity firms have with the banks is that they are big customers. Recently, lending is below water and customer relationships have turned somewhat toxic."
Is A Settlement In The Works?
Instead of spending untold money on attorney's fees in what could be a protracted court case, the warring parties could choose to settle, which could involve some sort of renegotiated share sale price. "It's part of the process," HAVERTY said. "Right now neither the banks nor private equity wants to pay $600 million to CLEAR CHANNEL shareholders. My guess is there will be a transaction rather than someone paying the $600 million."
Ironically, CNN MONEY reports that should the deal break down, STANDARD & POOR'S RATINGS SERVICES would actually raise CLEAR CHANNEL's B+ rating -- although not back to investment grade, due to the tight credit environment and CLEAR CHANNEL's vague contingency plans to increase shareholder value. If the deal successfully closes, though, S&P plans on lowering CLEAR CHANNEL's long-term corporate credit rating to B from B+ and to lower the existing senior unsecured notes rating to CCC+.
Yet according to a late BLOOMBERG report, CLEAR CHANNEL's debt may be downgraded to below-investment-grade whether the deal goes through or not. MOODY's Sr. Analyst SHILPA PARANDEKAR wrote in a note TODAY that the ratings "still have a high probability of being downgraded to speculative grade based on the company's now demonstrated predilection for shareholder-friendly behavior."
Last DECEMBER, MOODYS said it expected to downgrade CLEAR CHANNEL's Baa3 debt rating, the lowest investment grade, by five levels to B2 following the acquisition.
Follow the effect of all this on CLEAR CHANNEL's stock price here.