Clear Channel: Selling to Ourselves

As an LP with broad exposure to alternative investments, I’ve previously lamented owning entire capital structures. In mega-buyouts, we often find ourselves owning the equity and the debt, and paying 2-and-20 on each.

If you took that approach to public companies, you wouldn’t be in the investment field very long. For LPs with exposure to multiple mega-LBO firms, there is a a related problem of selling to themselves – and paying deal fees along with the carry each time. The Clear Channel deal has demonstrated that there is an even worse fate – not selling to yourself.

CCU is probably one of the most widely-held names in event-driven hedge fund space today. Financially-backed deals have been puked out of many merger arb portfolios, but Clear Channel has remained in many funds. One prominent fund holds over 7.5% of the outstanding shares. Those who held it were well aware of the losses that the banks were sitting on with estimates between $1.5 billion and $3 billion. They also realized that facing an abyss the banks were less likely to concern themselves with a loss of reputation if they walked. The key variable for them was whether the sponsors were interested in completing the deal or in greenmail.

As Dan pointed out previously, if the sponsors weren’t interested in closing the deal they have gone to great lengths to lay a paper trail for the courts to force a reverse-termination fee. Of course, that fee is a fraction of the mark-to-market losses on the loans.

While many observers assumed that the sponsors would be happy to walk due to the valuation declines in the market, they mostly ignored the other economics of the deal. CCU’s cash flow has continued to grow during the lengthy process, and the terms of the transaction are not replicable in today’s debt market.

If this truly were a bad deal for the sponsors some LPs would be in a difficult position – happy to lose it in the private equity portfolio, cringing at the losses for the hedge fund portfolio. If the deal is as solid as the sponsors seem to think then we are all rooting against those banks. After all, hedge fund portfolios don’t need anymore hits in March.

At least some uncertainty was removed today – the suit asserts “The Court should order specific performance to require defendants to honor their obligations under the Commitment Letter.” Specific performance is a relief for hedgies to hear, hence to two-point rally in the stock after hours.

Mike X is a peHUB contributor who makes alternative asset investments for an endowment with assets in excess of $1 billion. He previously worked as an investment consultant to endowments, foundations and corporate pension plans.