The $18.7 billion buyout of Clear Channel Communications, the nation’s largest radio broadcaster, has become a test of wills between some of the nation’s largest investors, like the mutual fund giant Fidelity Investments, which plans to vote against the deal, contending it severely undervalues its shares, and the two private equity bidders, Thomas H. Lee Partners and Bain Capital, The New York Times writes.
At issue is the price. The investors want more money; the bidders refuse to raise their price and have threatened to walk away from the deal if it is voted down.
The deal, which would be the largest media and entertainment buyout in history, will be voted on in less than three weeks. The sale requires approval from two-thirds of the shares outstanding. If current shareholder sentiment holds and a higher offer does not emerge, the deal will almost certainly be dead.
The fight over the Clear Channel sale is being closely watched by investors as a proxy for the future of the buyout boom. Many investors have watched with growing unease as private equity firms have walked off with companies, at what appeared to be a reasonable premium, only to turn them around a year or two later and seemingly double their money.
In the case of Clear Channel, which also owns billboards and other outdoor advertising, the private equity firms agreed to pay $37.60 a share, representing a premium of about 25 percent over its 30-day trading average before it went up for sale. Since the deal was struck, however, shares of radio and outdoor advertising companies have surged, making the price seem cheap to some.
What lies in the balance is the future of Clear Channel, which was founded by the Mays family in 1972 and has more than 600 stations nationwide and more than $6 billion in revenue.
Some shareholders are not only willing to take the risk of continuing to hold Clear Channel if the deal collapses; they are rooting for it. Yet it is a bet that may come with some substantial risk.
Shares of Clear Channel, which closed yesterday at $35.62 in regular trading, could take a tumble, according to some analysts.
“In the absence of a buyout bid, we believe CCU shares could trade in the $32-$33 range, as we have become incrementally cautious on the radio,” Anthony J. DiClemente, an analyst with Lehman Brothers, wrote in a note to investors. Similarly, Jonathan A. Jacoby at Bank of America said, “We believe that there is downside risk if the deal falls apart.”
A decline may be fine for long-term shareholders like Fidelity and T. Rowe Price, which has also came out against the deal, but it may be harder to stomach for arbitragers and hedge funds like Highfields Capital Management, which is said to be planning to vote against it. (Fidelity, for its part, has quietly sold about 20 percent of its position already.)
Still, other analysts contend Clear Channel’s shares could rise. Laraine Mancini, an analyst with Merrill Lynch, believes Clear Channel’s shares are worth $40 a share and argues that the private equity partners could afford to pay $41 a share and still reap a 20 percent annual return.
Proxy Governance, which gave the deal a “reluctant” thumbs up, said: “Given the opposition to the merger, we would hope that management work with the investor group to raise the offer closer to what the market had anticipated — approximately $40 per share.”
But it may be wishful thinking.
“We wish we could raise our bid, but it doesn’t make sense,” a person involved with the bidding group who was not authorized to comment, told The Times. “We can’t make the numbers work. The reality is we’re getting very nervous about the radio market.”
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