Clear Channel Communications has been caught up in the kind of private equity in-fighting that will become increasingly common as the flight out of debt based businesses continues, in the wake of the US sub-prime mortgage disaster.
It is in the throes of being acquired by Thomas H. Lee Partners and Bain Capital for $19.5 billion, but a transaction that may well have been an important contingent step, the sale of the bulk of its TV stations to a unit of Providence Equity Partners for $1.2 billion has fallen through, and clearly now the financial equation, always tight at debt based transactions, no longer adds up.
The company is to sue Providence subsidiary Newport TV, specially put together for the acquisition, for pulling out of the deal, and has called on a the Delaware Chancery Court to force the transaction to go ahead.
The problem with any deal that uses debt to fund a purchase and re-structuring of a major company, is that the ability to replace or re-structure debt has been getting worse and worse in the US, and it gives less and less room for movement for these kinds of deals.
And that in turn gives Private Equity deals a bad name, and means that less and less of the companies that are caught by a new wave of technology, such as a shift to digital markets or a flight of advertising to the internet, can find a way out using debt funding.
The court has not yet made the filings available, but the company has confirmed the suit to US papers.
Clear Channel has, over the past five years, been caught in the crossfire as one of the largest owners of radio stations, at a time when US radio advertising began to slump, with consequent revaluations of that and its outdoor advertising business, caused by the shift to internet advertising. Clearly it is a business that will probably be broken up, updated and then either sold off with parts of its taken public again in the future or sold in its entirety.
A spokesman for Providence has told US papers that talks with Clear Channel are continuing and that they are negotiating new terms, and that the suit came as something of surprise. We wonder how many unsigned private equity deals will falter as a result of the US debt crisis?
Meanwhile Clear Channel results were a shot in the arm for the company, with revenues for the full year up 6% to $6.82 billion with only $140 million of that due to exchange gains.
Outdoor was up 13% to $3.3 billion but most of the foreign exchange gains were here, which cancels much of the gain. One of the logical moves under private equity would be to sell off its overseas outdoor activities and invest the proceeds in more internet advertising.
In the US, outdoor revenue was up by $143.7 million or 11%, with the growth happening across the board including bulletins, street furniture, airports and taxi displays.
At its recent shareholder meeting the sale of the company was approved by shareholders, who were initially upset at the transaction when it was announced over a year ago. The company at the time said that its radio stations throw off enormous amounts of cash, some with margins above 60%, and that it tried all the things that Wall Street asked of it, buying back its own stock, issuing dividends, selling assets but none of them moved the share price. Shame no-one suggested it invests in online content services.
Since then the company has said it will sell 448 of its 1,150 radio stations and all of its TV stations and either the overseas or all of the outdoor business leaving it a cash cow of the top US radio properties.
We said at the time that it was only selling off businesses with low margins and that it would be hard pushed to get a decent price.