The leveraged buyout of Clear Channel Communications just might get done after all. A Texas judge has issued a restraining order that seemingly prevents the banks that promised to finance the deal from backing out, the Associated Press reports.
Bexar County Judge John Gabriel reportedly barred the six banks from “engaging in any other conduct that would operate to modify, compromise, jeopardize, sabotage, undermine, nullify, void, eliminate, hinder, or obstruct consummation of the merger agreement.” The temporary restraining order came four hours after Clear Channel and the private-equity buyers filed a lawsuit on Wednesday in Texas and New York.
The lawsuit alleges that the banks are “refusing to execute necessary documents in an overt effort to ‘run out the clock’ and cause [their] merger agreement to collapse” and are “fabricating false reasons to refuse to proceed with the transaction – all in an effort to deprive Plaintiffs’ of their vested contractual rights under the Merger Agreement which Defendants know must close by June 12, 2008.”
In response to the restraining order, Clear Channel fired off a press release commending Gabriel. “Judge Gabriel clearly recognized the importance of the banks’ agreement and duty to provide debt financing to the merger,” the media company stated. “He found in favor of Clear Channel’s claim that irreparable harm would result if the Banks were not immediately enjoined from tortiously interfering with the Merger Agreement.”
In November 2006, a group led by the private-equity firms Thomas H. Lee (THL) Partners and Bain Capital Partners agreed to buy Clear Channel, the nation’s biggest radio station owner, for about $18.7 billion plus the assumption of about $8 billion in debt. Since then, the stock has tumbled amid the global credit crisis and stock market sell-off. The banks that agreed to provide the financing include Citigroup, Morgan Stanley, Credit Suisse, RBS, Wachovia, and Deutsche Bank.
In a joint statement last week, Bain Capital and THL Partners said: “We want to do this deal. We are ready to close, have funded the equity portion of the purchase consideration, maintain our enthusiasm for the investment, and are fully prepared to fulfill our contractual obligations to complete the deal.”
Clear Channel and its private-equity buyers are accusing the lenders of trying to avoid honoring the financing commitment by turning a long-term loan into a short-term one with restrictions, according to the AP report. Some observers believe the judge’s order will lead all of the sides to settle, however.
The banks stand to lose $3 billion to $4 billion when they loan the funds. However, AP notes that the only real “out” they have is proving there has been some sort of material adverse change, which is the key provision that most parties to a merger cite when they get buyer’s remorse. However, Clear Channel’s strong performance in recent quarters seemingly precludes this provision from being triggered.
Whatever the outcome, Clear Channel will not exactly be endorsed by the rating agencies. Moody’s said last week that the company’s ratings remain under review for possible downgrade pending closing of the acquisition.
If the buyout is completed, the company’s pro-forma leverage is expected to increase substantially and the postacquisition company will have significantly weaker credit metrics, Moody’s asserted. “Assuming the transaction is completed as currently contemplated, Clear Channel will likely be assigned a Corporate Family Rating of B2 and the rating on the existing senior notes is likely to be notched down to Caa1 based on their expected subordination to the new senior secured debt facilities and the new senior notes,” Moody’s said in a report.
However, the rating agency added that if the proposed leveraged buyout does not close, Clear Channel’s ratings still have a high probability of being downgraded to speculative grade based on what it calls the company’s now-demonstrated predilection for shareholder-friendly behavior. “If the buyout does not close, the review will focus on the company’s business strategy and financial policy including management’s tolerance for financial risk,” said Moody’s.