Say what you will about how well the Mays brothers have managed Clear Channel Communications (CCU), what is indisputable—ever since the mid-1990s when they began an extraordinary streak rolling up radio stations—is that the two executives know how to close a deal. So it may be premature, as news reports on Mar. 26 suggested, that Clear Channel's $19.4 billion deal to take itself private is headed south, 16 months after it was announced.
The banks that agreed to finance the deal, including Citigroup (C) and Morgan Stanley (MS), want out, or at the very least, better terms. And who can blame them? They face at least a $3 billion deal loss on the day the deal closes, stemming from the credit crunch that has led to a markdown in debt of about 15% since the banks first entered the deal. Clear Channel shares are now more than $12 below the price at which the company agreed to be taken private. Taking that kind of multibillion-dollar hit would certainly make paying a $600 million breakup fee to Clear Channel and getting out of the deal altogether—if they could—the more palatable alternative.
But Clear Channel CEO Mark Mays and CFO Randall Mays, sons of the radio giant's co-founding patriarch Lowry Mays, along with their private equity partners in the deal, Thomas H. Lee Partners and Bain Capital, are determined to finish what they started. Just hours after the news reports surfaced, Lee and Bain sued the consortium of banks in state courts in Texas and New York to make good on their commitments to finance the deal. Clear Channel joined the suit as a plaintiff in Texas.
"The financial risk to the banks in this suit dwarfs any risk they think they have in funding the debt," Mark Mays said in a statement. "The behavior of these banks is irresponsible, unprofessional, and unjustified. The defendants have made clear that they are determined, by any means possible, to destroy the merger and thus avoid their obligation to fund, as they are required legally to do." Citigroup, in a statement issued for the consortium, said the banks consider the lawsuits without merit "and will contest them vigorously," according to news wire reports. Other banks in the financing syndicate are Credit Suisse (CS), Morgan Stanley, The Royal Bank of Scotland (RBS), Deutsche Bank (DB), and Wachovia (WB).
What could be a problem for the banks is where one of the lawsuits is being filed: San Antonio. Not only is it the city where Clear Channel is based but it is also the home of a previous landmark case involving similar contractual issues.
The private equity firms and Clear Channel are charging something called "tortious interference," which essentially means the banks' hesitance to finance the deal interferes with Clear Channel's commitment to its shareholders. That makes it not exactly a great place to be defending such a case.
In a groundbreaking courtroom battle back in the mid-1980s, Pennzoil won a $10 billion judgment from Texaco after it tried to intervene on a bid from Getty to buy Pennzoil. Pennzoil argued "tortious interference" in what will likely be the same courtroom where Clear Channel and its partners will argue their case. Texaco later settled for $3 billion. The fact that this precedent was set in San Antonio on this issue does not bode well for the banks, says legal experts. Texas legend and billionaire lawyer Joe Jamail, Jr., who represented Pennzoil in the earlier case, has been hired to represent the private equity firms and Clear Channel.
Neither side is commenting beyond prepared press releases, but it's obvious that a game of chicken is being played out. The lawyers will get their fees, of course. And somebody may end up with a breakup fee. But in the end, it's not clear what Clear Channel shareholders receive, especially having to wait in deal limbo since November, 2006. On Mar. 26, the company's stock fell nearly $6, to $26.92 a share, on news that the deal may be in trouble.
And for the Mays brothers, it means more hand-wringing in the weeks to come about the fate of a company their father created when he bought his first radio station 35 years ago in San Antonio.