A State judge in Texas has issued an order temporarily restraining an international banking consortium from interfering with the consummation of a $26B buyout of Clear Channel Communications (CCU).

It is a story with all the makings of a Wall Street suspense movie. We have a huge media conglomerate owned by the Mays family - a Texas dynasty. There are clever, wealthy, and handsome private equity CEOs negotiating billion dollar deals- think Richard Gere and Michael Douglas.

The plot involves a nationwide financial crisis and an international banking conspiracy revealed when an email with highly confidential documents goes astray. The story climaxes in a double courtroom drama, with a street-fighting Texas super-lawyer representing the Mays dynasty. We have a judge's orders signed at late night meetings and giant Wall Street law firms playing a legal chess game in the halls of justice of two states.

Finally, although the ending has not yet been written, events are leading to a happy conclusion, as surely as any 1950s Hollywood production. The bankers will be defeated and the Mays dynasty will get richer, along with the handsome private equity firm CEOs and those arbitrageurs who have the guts of Dirty Harry.

Don't rush to your typewriters. I've already copyrighted the characters and plot, presented the idea to Hollywood, and begun negotiations for the TV series.

The Story Begins

In November 2006, private equity firms Thomas H. Lee Partners and Bain Capital Group joined forces to offer $37.60 per share for Clear Channel Communications. The multi-billion dollar deal was backed by commitment letters from an international consortium of banks.

Shareholders rejected the offer as inadequate. Other bidders for Clear Channel emerged. Finally, in May 2007, Thomas H. Lee Partners and Bain Capital win shareholder approval of a merger agreement by offering $39.20 per share and an unusual provision permitting shareholders to opt to exchange their Clear Channel shares for shares in the post-merger company up to a 30% ownership interest.

The merger agreement gives the buyers very little wiggle room. The contract between the buyers and Clear Channel is not contingent on financing. If the buyers cannot proceed with the deal, the break-up fee is a huge $600 million.

To support their offer to Clear Channel, T. H. Lee and Bain negotiated $22 billion worth of equally tight credit commitments from a consortium of six banks. The commitment letters contain virtually no way out for the banks. All credit-market risk is placed on the banks.

The buyers and Clear Channel proceeded to file for regulatory approval. Obtaining the approvals and licenses necessary to sell a multi-state broadcasting concern is no easy task. After the expenditure of a great deal of time and money, the last approval was received in late January 2008, and everything was in place for a first quarter close.

The Plot Thickens

Due to deterioration in the credit markets, a mere two months after they signed the final credit commitments, the banks had second thoughts.

Last July, the buyers became aware that the banks were having lender's remorse when, according to the New York Times, someone at Credit Suisse (CS) made a grievous error. The buyers were included in the list of recipients of a highly confidential email communication between the banks. The email reportedly discussed means that might be used by the lenders to extricate themselves from their commitments.

Once discovered, the banks attempted to force a renegotiation of the loan terms with the buyers by making financing of other deals dependent on renegotiation of the Clear Channel commitments. The tactic didn't work. In December the banks approached the buyers, "hat-in-hand" to beg the buyers to shoulder $600M of the bank's expected $2.7M expected paper loss when the loans are marked to their market price. Again, Clear Channel's buyers remained firm.

Finally, knowing the borrowers would never agree, the banks provided final loan documents that contained some unusual and onerous conditions to the loan. The credit commitment provides that the terms of the final agreements will be the same as stated in the commitment, and as to any terms not spelled out in the commitment, that such final terms shall be "no less favorable" to the borrowers than terms provided in similar agreements in the past between the borrowers and the banks.

The purchasers allege that the banks have not provided any prior agreements upon which they relied in attempting to include the terms to which the borrowers now object. A reading of those terms would support the notion that the borrowers never agreed to such terms in the past.

By insisting on final loan terms to which the borrowers could not reasonably agree, the banks appear to have been hoping that the purchasers might want out of the merger, and would use the onerous loan agreements as an excuse to pay the $600M fee to Clear Channel and break the deal. The bank reasoning seemed to be that if the borrowers sued, the worst result would be that the banks would be forced to make the loan. In such case the banks would be no worse off. The best result would be that the court supported the banks, and they could get out of their obligation with the only downside being that they would not receive the $360M of fees they were to receive. No doubt the banks believed the second best result would be that the banks would be required to reimburse the buyers for the $600M break up fee.

Weighing a loss of its fees plus a $600M litigation risk against a sure $2.7B of paper losses, the banks decided to roll the dice. In so doing, they seriously miscalculated. Clear Channel and the borrowers have filed suit in two different states requesting not only that the banks be forced to go ahead with the terms of their commitment letter, but also asking for judgment against the banks in the amount of $26B plus punitive damages.

The Final Courtroom Drama

The funding agreements the banks presented to the buyers contained unusual provisions forcing early retirement and probable refinancing of the loan. T.H. Lee and Bain balked.

Two different lawsuits were filed against the banks.

Several corporations set up by the purchasers to facilitate the transfer of Clear Channel's assets filed suit in New York State Court to enforce the credit commitments of the banks. The suit was brought in New York because the commitment agreement names New York as the agreed jurisdiction to handle any disputes arising out of the commitment. The New York lawsuit requests that the banks be forced to perform under their commitment letter, as well as damages for breach of contract, civil fraud, and civil conspiracy under Massachusetts law.

Clear Channel and CC Media Holdings, the company that will operate Clear Channel after the closing, joined in a different complaint filed in Texas State Court. The Texas action asks for an injunction against wrongful interference with the merger, and $26B in actual damages plus additional punitive damages for wrongful interference.

In Texas, the court action alleges that the banks are wrongfully interfering with the contract of sale between Clear Channel and CC Media. San Antonio based Clear Channel, and the Mays family, enjoy a significant home court edge in the San Antonio court.

The Texas action, although it requests an injunction that would have the effect of enforcing the commitment letter, does not actually arise out of the commitment agreement itself. Clear Channel is not a party to the credit agreements of the buyers, and therefore would not have standing to directly request performance of those agreements. Instead, quite cleverly, the Texas suit complains of wrongful interference with the purchase agreement between Clear Channel and CC Media Holdings. The basis of the interference claim is the failure of the banks to honor their financing commitments, and the Texas suit requests either an injunction against such interference or, in the alternative $26 billion in actual damages and additional punitive damages.

By asking the Texas court to order that the banks cease wrongful interference with the merger, Clear Channel is able to indirectly obtain an order enforcing a contract to which it is not a party in a jurisdiction presumed to be less favorable to the banks than the New York courts. The Texas suit gives the anti-bank forces a second bite of the apple, and adds a whole new level of potential liability and litigation risk for the banks.

To send a message that the Texas suit was not merely filed for the purpose of posturing, the plaintiffs hired famed Texas lawyer Joseph D. Jamail. Forbes has hailed Mr. Jamail as the highest paid plaintiff's counsel in the United States -- no small feat. He is credited with establishing precedent for improper interference claims under Texas law when he won a $10 billion dollar judgment on behalf of Pennzoil based on a claim of wrongful interference by Texaco with an agreement by Getty to buy Pennzoil..

Mr. Jamail is known for receiving his main compensation from a percentage of the proceeds of the suits he prosecutes. He is not the sort of counsel one hires to prosecute a case brought for show. He prosecutes cases to win.

The dispute between the lenders and the buyers in the Clear Channel deal is significantly different from the usual litigation in acquisition deals. This is not a case in which the banks can claim a material change in the financial condition of Clear Channel. The loan commitments are very strong. The banks cannot, and do not, assert that they are not bound by their agreement to provide financing. Instead, the banks claim that they have complied with their commitment agreements, and that they stand ready to fund the deal.

The banks provided final financing agreements to the buyers. The issue is whether the terms of the financing agreement comply with the terms of the bank commitment agreement.

Specifically, the commitment letter states with regard to the final financing that it shall contain the terms specifically set forth in the commitment, and as to any terms not specifically stated in the commitment, that such terms shall be "no less favorable" to the borrowers than the terms contained in other similar financing agreements between the banks and either of the private equity firms.

Without examining prior agreements between the banks and the purchasers, it can be assumed with reasonable certainty that the terms about which the purchasers are complaining do not have any precedent in other financing documents. Some of the terms in the disputed loan agreement appear to be quite unusual, and are so onerous that it is unlikely either of the private equity firms ever agreed to such terms in any prior financing. It is easy to see that such terms are not favorable to the buyers, and, if there is no precedent for them, that they are "less favorable" than the terms of similar prior agreements. Thus, the banks have not complied with their commitment to provide terms that are "no less favorable" than those contained in prior agreements with the borrowers.

In both court complaints it is claimed, under oath, that the purchasers requested some precedent to support the inclusion of certain unfavorable terms, and that the banks provided none. The conclusion drawn in the court complaints is that the banks provided no precedent because they have none.

Clear Channel and the buyers did an end run and obtained an order in Texas that purports to require the banks to provide the funding for the deal. The order was obtained in what is called an "ex parte" proceeding.. "Ex parte" simply means that the banks were not notified, were not required to be notified, and the order was obtained without the banks' side of the argument having been heard. That is why the order is only temporary. The banks must be served, and April 8 has been set as the date on which all parties will be heard.

As an indication of the advantage that Clear Channel and their lawyers may have in Texas, the ex parte order was signed outside of normal court hours at 8:45 PM. The execution of the order was not an emergency. The merger agreement and commitment letters have an expiration date in June 2008. The speedy issuance of the order, however, was important to calling the banks' bluff before the scheduled March 27 closing date, and the Texas court complied with what appears to be an emergency order.

The banks filed an application in Texas Federal Court making requesting that the Texas suit be transferred to the Federal jurisdiction. The Federal Court refused to transfer the matter from the Texas State Court, and the banks have now filed in the New York case for a transfer of the Texas suit to New York.

The Probable Outcome of the Litigation

It can never be predicted with absolute certainty what a judge or jury will do, but educated assessments of probability can be made sufficient for good, albeit speculative, investment decisions.

The banks' New York transfer application is as doomed as their failed Texas Federal Court application. Since Clear Channel is not a party to the loan commitment agreement, Clear Channel did not agree to jurisdiction in New York. The Texas State Court clearly has jurisdiction over the parties and the subject matter. The banks may have a valid argument that CC Holdings, as the successor of one of the commitment letter parties, should be forced to litigate in New York, but Clear Channel is not a party to the commitment letter or financing agreements, and the Texas case will continue at least as to Clear Channel.

CC Holdings will argue, for its part, that the wrong of interfering with the merger agreement exists on its own, separate and apart from the commitment agreement, and therefore is not a dispute arising out of the commitment agreement itself. In addition, since Clear Channel cannot be forced to litigate in New York, requiring CC Holdings to litigate the same claim in a New York court would be an unnecessary duplication of effort and mere forum shopping on the part of the banks.

Finally, under the Constitutional concept of full faith and credit, the New York State Court cannot and will not disturb the Texas State Court's ruling that it has jurisdiction. To get the Texas matter transferred to New York, the banks will need to make and win a transfer request in the Texas State Court. Such an application is less likely to succeed than it is to get the Texas judge angrier than he may be already.

So far, the banks have ignored the Texas judge's restraining order by failing to negotiate good faith financing terms and by failing to appear at the March 27 scheduled closing. The banks' Federal Court and New York State Court transfer applications appear to have been filed merely so that they can be used as an excuse for the failure of the banks to act pursuant to the order of the Texas judge. Investors will get whipsawed if they attempt to react to every pronouncement of the parties. At this point, all sides are engaged in posturing. Those actions and positions are not necessarily indicative of the actual state affairs.

The banks are currently engaged in a very dangerous course of action. Implicit in the banks' transfer applications is a claim that the Texas State Court is not a fair forum. Further, the banks appear intent on ignoring the Texas judge's order. If the Texas judge is like most others, whether or not he can punish the banks for contempt, he will not be pleased by the banks' actions. When the banks come back before the Texas state judge, he is likely to punish them and their counsel whenever and wherever the opportunity may arise.

Even though the Texas temporary restraining order has not resulted in causing the deal to close, it represents good news to Clear Channel investors for a different reason. Temporary restraining orders require a finding by the judge that the plaintiffs are likely to prevail in the suit.

The banks have to be shaking in their boots. Although they have not yet filed answering papers, the banks do not appear to have any reasonable argument. The errant email last July will be used as evidence of bad faith on the part of the banks. The banks now face a litigation risk on two fronts that is 20 times greater than their loss if they were to simply go ahead with the loan. The banks could be ordered to complete the loans and, in addition, suffer actual and punitive damages for fraud, civil conspiracy and wrongful interference with the merger.

Since Clear Channel is a very different party from the buyers, Clear Channel's Texas action is not, legally, a second bite of the apple. If the New York court refuses to order specific performance of the commitment letter as to the buyers, Clear Channel can still validly get an injunction on their own behalf in Texas, and vice versa. In layman's terms, the banks have been flanked and are surrounded. The war is probably as good as over. Everything bodes well for an eventual capitulation by the banks, and a funding of the merger.

Motivation of the Characters

The banks clearly want out of their loan commitment, but they can't get out. They were blindsided by the Texas litigation. Clear Channel and its buyers have the banks in a very vulnerable position and they can smell blood. The risk-reward has been altered drastically against the banks. Suddenly, funding the merger has changed from the worst possible result for the banks, to the best.

In Texas, the judge, in issuing a temporary restraining order, has already ruled that the plaintiffs are likely to succeed in their suit. The banks will not attempt to face Joe Jamail in a Texas Court in front of a Texas jury, with a weak case and more than $26 billion on the line.

The banks will also realize that, now that their actions have become public, their reputations have been irrevocably damaged. As Bear Stearns recently illustrated, the most important asset a bank has is its reputation.

The banks will panic. After a bit more posturing, the most likely result will be that the banks offer an even sweeter financing deal than might otherwise have been acceptable just to get out of any possible additional liability and in an attempt to repair their image

The biggest risk to shareholders may well be that Clear Channel or the buyers decide that the monetary damages are worth more to them than the deal.

It has been postulated that the buyers may regret their decision to purchase Clear Channel and may be seeking an excuse to get out with the banks paying the break-up fee. This opinion has come, in the main, from arbitrageurs -- a notably nervous group.

Any reasonable assessment of the facts, however, fails to support any conclusion that the buyers want out.

Thomas H. Lee and Bain Capital made their final offer and signed the merger agreement in May 2007. The two private equity firms wanted Clear Channel so badly that they were willing to bid up an extra $800 million for it. They also took the unusual step of allowing dissident shareholders to keep a stake in the company after the merger.

Clear Channel shareholders rejected the original offer of $37.60 per share because they believed it undervalued the company. The rejection of the offer was not a bargaining ploy. The main objection and valuation assessment came from Fidelity Investments, which owned about 9.7% of Clear Channel. Fidelity is not exactly known as an activist investor. Their objection was likely based on a sincere valuation of Clear Channel.

The value of Clear Channel has increased over the past 10 months. Earnings for the year 2007 were in line with analyst estimates, and grew 17% over the 2006 earnings. Clear Channel has become leaner and meaner by successfully selling off TV and radio stations in its poorest-performing markets, taking in almost $2 billion on the sale.

Clear Channel has everything private equity firms crave, including strong cash flow, a low pre-merger debt to equity ratio and a record of steady earnings growth.

The Clear Channel merger has also become cheaper to finance. Floating interest rates on the financing are tied to Libor and have decreased since May. Interest on the loan now stands at a very reasonable 5%.

In addition to its 900 domestic radio stations, Clear Channel owns equity interests in numerous foreign broadcasters. Of Clear Channel's 897,000 outdoor advertising signs, 688,00 are overseas. Clear Channel has benefited from the effect of the falling dollar on its foreign earnings and the value of its foreign assets.

The buyers expended a great deal of time and effort in obtaining the permits, approvals and licenses necessary to operate Clear Channel. Those licenses and permits are, in themselves valuable and would be lost if the deal fails.

Finally, there are irreplaceable intangible benefits to owning the largest broadcaster in the United States

Some arbitrageurs have pointed to the weakening economy causing a weakening outlook for advertising. Such short-term thinking is not usually the basis for purchaser action. Before spending $26B, it must be assumed that the purchasers took into consideration the fact that the economy may have weak periods. It is the long-term outlook for a business that motivates taking it private, not the prospects for the next quarter.

There is no rational reason to assume that the buyers have changed their minds about purchasing Clear Channel over the mere 10 months since they made the deal. As evidence that the buyers are determined to go ahead, they have requested Clear Channel to delay declaration of the dividend to shareholders.

A Happy Ending

Clear Channel is currently trading between $28 and $29. There is an estimated 75% probability of a favorable court ruling and that the deal will be completed at a price of $39.20.

If the deal cannot be completed, the immediate downside should be in the area of $20-$22 as the arbitrageurs head to the exits. Many arbitrageurs already exited before the suits were filed. Clear Channel dropped to a low of $25.60 before recovering to its current level. The $20-$22 value would likely be just a temporary low, however.

Before the first purchase offer in November 2006, Clear Channel had traded for two solid years in a range from $27.50 to $32.50, never significantly higher and never significantly lower. For the reasons previously discussed, Clear Channel is worth more now than during the years 2005 and 2006. Despite Clear Channel's market price before the offer, Fidelity Investments and Highlands Capital believed that the value at that point was in excess of $37.60, and the $39.20 would not have been approved but for the share exchange portion of the buy out. Between the first offer for Clear Channel in November 2006 and the final offer in May 2007 other bidders emerged for Clear Channel.

There is no reason why, if the deal falls, that Clear Channel should not recover from the initial sell-off and begin to trade again at or higher than its level through 2005 and 2006. Thus, all alternate endings have a high probability of being happy ones for shareholders.

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Robert Kronenberg

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