In case you haven’t heard, Clear Channel and its prospective buyers – Bain Capital and Thomas H. Lee Partners – late yesterday sued six banks for refusing to fund the protracted $19.5 billion deal. The suits were filed in New York and Texas, with the primary difference being that the plaintiffs asked for the death penalty in Texas.
No, wait, I’m being told that’s not correct. The primary practical difference is actually that CCU is being represented in the Texas suit by Joe Jamail, who represented Penzoil in a suit against M&A backtracker Texaco. The result was a jury award that essentially bankrupted Texaco, so the banks should be more than a bit concerned about that one (which is a point I made this morning on CNBC).
A judge in the Texas case has already granted a temporary restraining order against the banks, which counter-intuitively means that the banks actually have to do something (i.e., fund the deal). But that’s probably just good headline fodder, as the banks can probably get around that by agreeing to erase the financing termination dates from their financing commitment letter (“See judge, there’s no rush…”).
There has been lots of speculation about motives on both sides of this case, and I’m not going to pretend that I have definitive answers. But my non-revolutionary take so far is this: The banks are calculating that they can lose less money by walking away than by funding the deal. It’s a completely logical assumption on the surface – a $550 million termination fee rather than a $3 billion market-to-market loss – but it takes a big change on potential liabilities. Not just because of Joe Jamail, but because there is not any real precedent here. I emailed last night with a PE litigation attorney who said he can’t remember a case where PE firms sued a bank to honor its financing commitment. His best analogy were the “lender liability” cases back in the late 1980’s/early 1990’s. Not quite apples-to-apples.
As for the private equity firms, I honestly believe that they want this deal to close. Yes they agreed to overpay, and I’m sure they’d like these lawsuits to result in CCU shareholders accepting a lower sale price (like, for example, the original bid). But I also sense a true-blue belief inside Bain and THL that this deal can ultimately make money, and that they’ve invested far too much time and effort to walk away now. Moreover, they could have called it a day yesterday by just suing for fees, but instead they sued for specific performance (thus the aftermarket stock spike yesterday). Call me naïve, but it is the sense I’ve gotten through hours of conversation with those in and around this transaction.
Clear Channel, of course, just wants its money.
We’ll be following this story all day, so make sure to check back for any updates.