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The $19.5 billion sale of the radio broadcaster Clear Channel Communications to two private equity firms is in jeopardy.
This time, however, instead of the buyers balking, the banks that had agreed to finance the deal have become apprehensive. Clear Channel [CCU
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] and the private equity buyers may go to court to try to force the banks to complete the buyout, according to people briefed on the negotiations, who were given anonymity because they were not authorized to discuss the deal.
The legal threat is the latest indication that the banks have become reluctant to put up the money for the sale, these people said. Earlier, the banks proposed that the buyers — Bain Capital and Thomas H. Lee Partners — put down more cash and agree to stricter repayment terms. The buyout firms have refused.
Among the lenders are Citigroup [C
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], Deutsche Bank [DB
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], Morgan Stanley [MS
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], Credit Suisse [CS
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], the Royal Bank of Scotland and Wachovia [WB
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].
Negotiations continued on Tuesday night, these people said, but if a deal is not reached, Clear Channel and the two private equity firms are expected to file their lawsuit, possibly as soon as Wednesday.
Clear Channel’s problems are the most recent instance of a private equity deal tumbling into court, as the squeeze in the credit markets has disrupted the buyout world. The cheap debt that powered the recent two-year buyout boom has disappeared, forcing the banks to sell those loans and bonds at steep discounts. At the same time, the acquisition business has cooled with private equity firms largely sidelined because they are unable to get financing from the banks.
The backlog of unsold debt from already completed deals — estimated at $130 billion for the loans alone — has forced banks to take billions of dollars in write-downs. While those write-downs have been only a small part of the losses that the banks have reported so far, many analysts expect problems with leveraged loans to grow.
Already, several other buyouts have ended in court, including those for Sallie Mae [SLM
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], the student-loan lender, and United Rentals [URI
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], the equipment rental company. Sallie Mae settled with its buyers while a Delaware judge ruled that United Rentals could not force its buyer, Cerberus Capital Management, to finish the deal.
Many investors have long regarded the sale of Clear Channel, first announced in late 2006, as one of the private equity deals most likely to fall apart. That has been reflected in its stock price, which has seesawed despite the buyers’ insistence that the deal would go through.
A cornerstone of the buyers’ argument is that the financing was rock solid, with few outs for the lenders.
It is possible that the banks are willing to take their chances in court, given the estimated $20 billion in debt needed to complete the deal. The breakup fee is $660 million.
By financing the deal, the banks would likely record an immediate loss of $3 billion based on the 15 percent discount that buyout-related debt is trading at in the markets, these people said.
Clear Channel, the nation’s No. 1 owner of radio stations and based in San Antonio, sued another buyout firm, Providence Equity Partners, earlier this year to complete the purchase of its television unit. That was quickly settled, but was replaced by another lawsuit -- this time by Wachovia, which was financing the television station sale, against its client, Providence. That second lawsuit was settled little more than a week ago.
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