Clear Channel sells, Cumulus goes sour

Clear Channel Communications has reached an out-of-court settlement with the parties involved in its highly contested leveraged buyout. But even with the agreement, the banks that signed on to back the original buyout are still slated to lose.

The new agreement reduces the purchase price from US$19.4bn to US$17.9bn. That is equivalent to a share price of US$36.00, down from US$39.20 a share on the original offer. As roughly US$2.5bn has been cut from the purchase price, the funds backing the transaction are also likely to be smaller. A reworked credit facility to fund the transaction is expected.

Significantly, the banks and equity investors, led by Thomas H Lee and Bain Capital, have agreed to place the equity and debt obligations necessary to back the transaction in escrow. Freezing the proceeds provides greater certainty over completion – Clear Channel shares gained 16.4% on the week to US$34.84. Upon the deposit of the funds in the escrow accounts, the parties involved will officially terminate the litigation.

The agreement is not a total success for all involved. Citi, Morgan Stanley, Credit Suisse, RBS, Deutsche Bank and Wachovia, the original bank group, have committed to a new credit agreement as part of the settlement. The banks that will be funding at 100 and are likely to receive a 200bp fee for the commitment still end up losing, suggest market sources. Despite improved market conditions, the facility is expected be offered below a 98 OID.

The buyout group did offer a concession by agreeing to increase the rate on the facility by 40bp to L+365bp, according to those sources.

Pending shareholder approval, the buyout is expected to close by the year-end. As an incentive, shareholders have the right to receive up to 30% of the new corporation’s equity as part of their compensation. Highfields Capital Management, the largest shareholder, has agreed to vote in favour of the transaction.

The agreement apparently ends what has been one of the most contentious buyouts. Thomas H Lee and Bain originally committed to purchase the broadcaster for US$26bn in 2006. Last March, the sponsors filed two lawsuits against the bank group, claiming that it had reneged on its commitment to provide up to US$22.125bn of debt to fund the deal. The buyers filed complaints in New York and were enjoined by Clear Channel in a lawsuit filed in Texas, where the company is headquartered.

The merger is expected to close in December 2008.

The proposed buyout of rival radio operator Cumulus Media came to a much quieter conclusion. An investor group led by Cumulus CEO Lew Dickey and Merrill Lynch Global Private Equity agreed to terminate the July 23 buyout agreement because “they were unable to agree on terms on which they could proceed with the transaction”. They are on the hook for a US$15m termination fee on the US$1.3bn transaction.

Now that the buyout has been cancelled, the previously passed credit facility amendment has been nullified along with it. In March, investors in Cumulus’s existing US$850m credit facility agreed to waive the agreement’s change-of-control clause to facilitate the buyout. They were to have received a 200bp fee to increase the spread on the US$850m facility from L+175bp to L+250bp. Now that there is no buyout, there’s no amendment and no fee.