The Wall Street Journal-20080130-Clear Channel Investors Fret About Buyout- No News Is Bad News- Holders Seem to Think- Value Falls --36-2-3 Billion

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Clear Channel Investors Fret About Buyout; No News Is Bad News, Holders Seem to Think; Value Falls $2.3 Billion

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The sound of silence is awfully hard to interpret.

But that is exactly what Clear Channel Communications Inc. investors were doing yesterday, and their interpretation was that the $19 billion buyout plan for the company was in peril. Combined with an already jittery market, the new worries sent the company's stock down 7.2%. Over the past two days, the value of the country's largest radio broadcaster has fallen by $2.3 billion.

Neither Clear Channel, nor its two buyers -- Thomas H. Lee Partners and Bain Capital -- were commenting yesterday about the transaction, which was first inked in November 2006. Thomas H. Lee partner Anthony DiNovi said he would be running afoul of SEC rules if he talked about the deal. And that seemed to be the problem.

Investors had taken solace in the buyers' public support for the deal. Just last week, TH Lee co-president Scott Sperling told a conference that the deal would close by the end of March. That candid support extended to private conversations between the buyout firms and investors. But those have been shut off, too, says one longtime Clear Channel investor.

One explanation, however, is that Mr. DiNovi hasn't been a part of the transaction, and didn't feel qualified to speak about it.

The market moves show just how distrustful investors have become after months of renegotiated and broken private-equity deals. Merger abitrageurs who play these stocks have lost their tolerance for risk, which has made takeover stocks wildly volatile. Clear Channel stock now trades at $29.17 a share, well off the $39.20 that the buyers agreed to pay.

One investor close to the deal, who hopes to see it close, insisted that the recent share drop was the result of nothing more than unwarranted panic. The buyout firms secured very favorable financing conditions for the transaction and are loath to sacrifice them and pay a breakup fee that could be as high as $600 million.

One important factor in the transaction is the fact that Bain Capital -- and not its investors -- would have to pay its full share of any breakup fee. That gives the firm another reason to see the deal through. TH Lee has shifted most of the eventual breakup costs to its investors, according to one person familiar with the terms.

Yet a host of other pressures should make for a harrowing few months ahead. The five banks financing the deal -- including Citigroup Inc., Royal Bank of Scotland Group PLC, Deutsche Bank AG, Credit Suisse Group and Morgan Stanley -- are eager to escape huge financing commitments. And the radio industry, already facing competition from satellite and the Internet, could worsen if the economy slips into recession.

In today's deteriorating climate, that deal on the table now looks pricey, with Clear Channel having been valued at 11.7 times its earnings before interest, taxes, depreciation and amortization. By one rough comparison, radio stocks now trade less than nine times their cash flow

"When this deal was beginning, the economy was growing, credit was easy and the radio sector" was growing, said Jim Boyle, an analyst at CL King & Associates, in a note to clients yesterday. As those situations deteriorate, he thinks the buyers' assumptions "have been significantly stressed." Now, he puts the likelihood of a deal going through at less than 50%; if the deal were being negotiated now, it would probably command a price of around $35.25, he says, compared with the agreed price of $39.20.

The apparent decline in Clear Channel's performance has fueled speculation that Bain and Thomas H. Lee will try to back out of the deal by claiming that the radio operator has suffered a "material adverse effect." Clear Channel's merger agreement with the two private-equity firms stipulates that the buyers can invoke this clause under extraordinary circumstances.

While it generally still shows good profit margins, the radio sector isn't growing, with total revenue stagnating at around $20 billion for years. Industry revenue figures aren't in for 2007, but through the third quarter, they didn't look promising. Local radio revenue, the industry's biggest category, was down 2% through the third quarter, while national was down 4%.

Fanning the flames this week was a memo Friday from Clear Channel radio head John Hogan to his managers. He told radio managers the division was generating less revenue for the quarter than anticipated, and less compared with the prior year, while expenses were up 4%.

"No one anticipated how challenging Q1 would be for us," he wrote. "We are operating in a different environment" compared with what the company had projected in the fall.