Clear Channel Shareholders Get Shafted

Whatever happened to the Lone Ranger? He came from Texas, and he wasn’t afraid of anything. Those who battled at the Alamo must be rolling over in their graves. Clear Channel (CCU) is based in San Antonio, and they have surrendered to a bunch of “effete intellectual snobs” from the East and Europe. The banks, the private equity buyers, and certain large shareholders joined forces against Clear Channel, and the Board crumbled.

The event will live to be studied by future warriors in our business schools as a brilliant coup. The banks got away free, the private equity firms got a reduced price, the controlling Mays family and large institutional shareholders got a better deal, and the public shareholders got to pay for it all.

I can’t complain too much. Right here at Seeking Alpha, I recommended buying Clear Channel at prices between $28 and $29 per share one month ago. After winning every round in the New York and Texas lawsuits, Clear Channel closed at $34.30 Tuesday based on a settlement of the litigation, and the shares will eventually be worth $36. A 20% gain in a month is always nice, but the victory feels hollow. It’s the principle of the thing. As happens too often on Wall Street, public shareholders are getting shafted.

In a press release issued late on Tuesday, May 13, 2008, Clear Channel announced that, subject to shareholder approval, the New York and Texas lawsuits have been settled. The terms of the settlement involve a reduction in the cash offered to shareholders. In return for lowering the cash portion of the purchase price, Clear Channel owners will have the security of knowing that the entire amount of that purchase price, plus all additional negotiated bank loans, along with all the fully executed loan documents will be held in escrow by the Bank of New York.

The funding banks could still litigate later to stop payment of the escrow, but that is unlikely and would have little chance of success. Then again, as discussed in my previous articles, the banks also had little chance of success in the current litigation.

In the end, Clear Channel’s public shareholders were defeated by something that no one contemplated – an unholy alliance between the private equity buyers, the bank lenders, and at least three of Clear Channel’s largest shareholders. It was an incredibly clever move by the banks, which, as I predicted, were not faring well in pretrial proceedings in either New York or Texas.

While financial journalists were occupied attempting to prove that each of them had the best anonymous source feeding him or her inside information, all of them, except Reuters, failed to report was that the matter did not settle on Tuesday afternoon. The New York trial actually began at 2 PM, after being adjourned from Monday and delayed once more on Tuesday morning to allow time for a settlement.

According to Reuters, John Connaughton, Managing Director of Bain Capital, took the witness stand and testified until almost 5:00 P.M. Judge Freedman then adjourned for the day, and ordered everyone to return to continue testimony the next morning. Judges don’t normally start trials if the litigants have settled. Clear Channel’s press release regarding the settlement was not issued until approximately 11:00 PM Eastern Time on May 13.

The banks snatched victory from almost certain defeat by joining with Highfields Capital Management to propose to the private equity buyers that they all join together to force Clear Channel to accept a reduced purchase price. Highfields holds 6.7% of the outstanding shares of Clear Channel.

Highfields Capital was an active forces involved in rejection of the original $36 per share offer by the current buyers back in November 2006 as inadequate. A different group, consisting of Providence Equity Partners, Blackstone Group, and Kohlberg, Kravis and Roberts Co. made a $37.60 bid. That deal was initially accepted, but was tossed out in favor of a higher $39.20 per share and equity option offer from the current buyers, Thomas H. Lee Partners and Bain Capital.

After being induced to relinquish a $37.60 per share sale, shareholders are now being coerced into accepting the previously rejected $36 offer. There is no material change in the underlying value of CCU that would justify the lower price. The merger agreement was firm. It had no loopholes. If financing failed, the buyers had to find it somewhere else, even at worse terms. Somebody owes the public shareholders an explanation other than the proffered excuse that the litigation was complex and would be expensive. Under no circumstances would the litigation have cost shareholders anything close to the $2.1 billion they will lose in the proposed settlement.

In an orgy of self-dealing on the part of everyone involved in the settlement, the shareholders are now being asked to bear almost the entire estimated loss of the funding banks. Of course, the public will not share a single dime of the $360 million of fees that the banks will receive.

In an attempt to put a prom dress on a pig, Clear Channel’s CEO is quoted as saying, “This revised agreement is a win for our shareholders . . .”

Let’s examine our “win.” The cash to be paid for each Clear Channel share has been reduced to $36 from $39.20. Add to that $3.20 pocket picking, last month’s $0.75 per share dividend that was delayed at the buyers’ request, and the $0.75 dividend that won’t be paid while shareholder approval of the new deal is pending. That $4.70 total multiplied by the outstanding shares equals $2.1 billion. That is almost the same as the banks’ estimated $2.65 billion market loss on the old deal. Shareholders, however, are not likely to complain as loudly as the banks.

The reduction in the loan amount, and the retention of the cash dividends will improve Clear Channel’s after-sale balance sheet, thereby improving the quality of the banks’ loans. That increased loan quality, combined with the effect of the Fed rate cuts and changes in the loan market, could prevent the banks from experiencing any loss at all on the CCU loan paper when the new deal is expected to close in September. .The banks will now loan significantly less money secured by the same assets, and will get much needed time to market the loans.

The private equity buyers get the same assets for $2.1 billion less than they agreed to pay. Why? To quote Clear Channel’s CEO, “This revised agreement is a win for our shareholders because it provides them with substantial value and certainty while avoiding the delay and inherent risks associated with complex litigation. Our shareholders will receive a significant premium over recent stock price levels and can elect to continue to participate in our future upside, “ and further, “Clear Channel’s business prospects will be enhanced further through an improved capital structure that includes a lower debt load.” Translation – so long as most of our shareholders make a profit, they are unlikely to complain about the amount of it, and besides, the value of our company, in which I and others will continue to participate, but which most shareholders will no longer own, is being enhanced to insider benefit, while the delay and expense of litigation will be exchanged for the greater delay and expense required to gain approval of a new offer. That’s all worth $2.1 billion, isn’t it?

The position of large shareholders has also improved. As I discussed in a previous article, several institutions were so enamored with Clear Channel that they insisted on the ability to participate in the new company. To induce those institutions to approve the merger, the buyers offered to allow them to exchange their shares of Clear Channel for shares in the new company on a one for one basis up to a 30% equity stake in the new company. The new company shares will not be listed on any exchange and are unlikely to have any public market.

To give the false appearance of fairness, the same option to exchange shares is offered to all shareholders. That’s what the CEO, Mark Mays, means when he says shareholders can “elect to continue to participate in our future upside.” It is highly unlikely, however, that any public stockholder will opt to receive a minority interest in illiquid shares of an unlisted company. Assuming few, if any, public shareholders will elect to receive shares in the new company, the Mays family and institutional shareholders will be able to exchange substantially all of their Clear Channel holdings for shares in the new company.

Naturally, even though the cash payment has been reduced, the share exchange terms remain in tact. It is still a one for one even exchange. The value of each share of the new company has increased, however, because, thanks to the sacrifice of the public, the debt of the new company will be 7% lower, and the cash position will be increased by the dividends that won’t be paid to the public. It is no wonder that Pentwater Capital Management, a hedge fund that joined in the Texas lawsuit, agreed to the settlement, and that Highlands Capital, which was active in bringing about the settlement, has pledged to vote its shares in favor of the new proposal.

Everyone involved is a winner except the public, which will pay the banks’ bill, and pay for the savings of the buyers, and pay for the enhanced value for the large shareholders.

If the litigation had continued, the provable damages in New York would probably have been the amount of the banks’ estimated losses, since if the banks were paid that amount the deal would be profitable again and they would probably go ahead with it. That judgment and a discontinuance of the Texas action could have been exchanged for performance on the loans. But why should everyone involved pay more legal fees and invest their time in a lawsuit in which some parties will be the losers, when they all can be winners on the backs of the public? Give the banks, the institutions, and the buyers credit. The idea of joining forces to make the small shareholders pay was brilliant.

The new offer will require a new proxy filing with the FCC, and a new shareholder vote. Texas requires a 2/3 vote of all shareholders to approve a sale. A majority of the public shareholders must vote in favor of the new deal for it to be approved.

Analyst estimates of Clear Channel’s share price without the deal vary from a low of $23 to a high of $39. Quoting the lowest $23 estimate as the result if the deal falls though is nothing more than a scare tactic. Historically, CCU has consistently traded above $27. The sale of non-performing stations has made CCU a stronger company. CCU is making innovative Internet deals. The company’s outdoor advertising business has improved, and they have profited from the currency exchange benefits of being the largest outdoor advertising company in Europe. Analysts’ average share price estimate without a buy-out deal is $30. The $500 million break-up fee that CCU would receive if shareholders reject the new offer would increase Clear Channel’s value by $1 per share. The two dividends that would be paid out to shareholders if the deal does not close are worth another $1.50 per share.

Maybe the public shareholders will take the long-term view, and accept $32.50 and future gains instead of $36 in the short term by refusing to approve the new deal, but I wouldn’t bet on it. I’ve sold all my shares, and taken my profit.

Disclosure: The author has no position in Clear Channel or any of the companies discussed in this article.

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This article has 4 comments:

• satx

  May 15 10:20 AM
  The dividend was $.175/share per quarter, not $.75. Other than, great article. Hopefully this angle gets played more in the mainstream media... but I'd bet against it.
• bluesmoke

  May 15 10:24 AM
  My personal opinion is CC has destroyed terrestrial radio. By consolidating programming, over leveraging with too many stations in the same market, catering almost exclusively to the narrow minded major labels, and homogenizing the industry in general, consider yourself lucky you got out when you did.
• User 189667

  May 15 08:35 PM
  As I emailed the company and Highfield, the stated problem was the bank's fair value accounting issue. That problem was market driven and mostly reflected the risk-based pricing in the current market disruption. That is quite a bit different than the actual credit risk embedded in Clear Channel's operations.
  
  I said the solution was so obvious that I did not bother to contact Clear Channel or Highland several weeks ago.
  
  That issue could, as you noted, be solved with the $3.20
  
  I wondered why would you sacrifice $3.20 per share when putting the $3.20 in escrow offering to buy the top riskiest slice of the debt for the $2.1 billion would make the fair value issue go away. It would have a two or three time limit and would preserve the chance for the $2.1 billion to go back to shareholders as the markets eventually normalize.
  
  Ofr course, we both think the real issue was not fair market accounting losses but the underlying implicit unsaid message that, unless we get what we want, the deal will unwind and the stock will sink.
  
  You're comments are right on.
• Robert
  Kronenberg

  May 16 12:28 AM
  Satx - Actually the .75 is the annual dividend. The quarterly dividend is .1875. I have to stop writing these articles at 2 AM. Not only did I forget to divide by 4, but I now notice several typos that got by me in the first 4 middle of the night rereads, and also somehow got by MS Word, which tries to correct that which does not need correcting but didn't pick up obvious mistakes in English. (Thank you Bill Gates). The change in dividend changes the screwing received by public shareholders from $2.1 Billion to a mere 1.77 Billion. I feel much better now. Thanks Satx. :-)
  
  The other numbers that change are the predicted share price if the new deal is rejected, which is now 31.375 instead of 32.50, and the total lost dividends, which are now .375 instead of 1.50.
  
  I hate to change any of the numbers in the article. Thanks to retail pricing and gestalt psychology, 2.1 billion sounds like much more than 1.77 billion. It won't matter if the numbers stay the same. You've all sold anyway, haven't you? You're not waiting to see if they find a way to do you out of the 3.3% you're scheduled to make between now and next September if the deal is approved, are you?
  
  Maybe some descendant of the Alamo with 500 shares and living in San Antonio will hire a lawyer and sue the bums in a Class Action. I hear Attrorney Joe Jamail currently has an opening on his calendar.

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