Clear Channel Showdown Signals Investor Wariness of Privatizations

By Dennis K. Berman and Sarah McBride

Big shareholders who fear being shortchanged in the $18.7 billion private-equity sale of Clear Channel Communications Inc. have touched off a showdown over the fate of the country’s largest radio broadcaster. The revolt signals what could be a wave of opposition to the public-to-private binge sweeping the markets, as investors question why current managers can’t squeeze out the potential profits attracting buyer’s attention.

The unexpected rebuke has left Clear Channel and its would-be owners — Bain Capital LLC, Thomas H. Lee Partners, and members of the company’s founding family — scrambling to save what was one of the most high-profile transactions of 2006. With the aid of a newly hired public-relations firm, company executives and bankers are preparing a road show to woo shareholders.

They will make their sales pitch without any peace offering. People affiliated with the buyers say they won’t offer another penny, and are content to let the buyout die if shareholders don’t support it. “It’s just another deal,” one of them said. Three used Wall Street’s stock phrase of resignation–”It is what it is”–when assessing the deal’s chances of approval.

The deal has become a crucial referendum on whether shareholders are getting a windfall when publicly traded companies are taken private – or whether investment firms are snatching up properties on the cheap. In Clear Channel’s case, for example, some major shareholders feel they stand to make more money by holding stock for the long haul than by cashing out now, even at a premium to the current share price. They reason that if the company is so valuable the buyers are willing to put up their own money, why should they want to sell it?

“It’s not only a company issue, it’s a systematic issue,” says Henry Ellenbogen, co-fund manager of the T. Rowe Price Media and Telecommunications fund and a significant shareholder over years in Clear Channel Outdoor. “As a marketplace, you can’t have an asset where people run it poorly, and put in incentives for them to cash it out at a lower price” than what the company could be worth if run differently.

Hundreds of billions of dollars have changed hands amid the current private-equity rush, and most deals have been approved with little investor resistance. But after years of outsized returns for buyout shops, the tide appears to be turning in the direction of what shareholders call “self-help.” That means having the companies themselves mimic the moves private-equity firms are making–including loading up on debt, tightly reining in costs and shedding key assets.

They do so, however, at the risk of passing up healthy, if not optimal, premiums in favor of gains that may be years down the road–if at all. That collision between the interests of short-term and long-term holders could force a rethinking of how private-equity deals are put together.

Regardless, there are increasing signs that shareholders aren’t simply willing to accept the deals presented to them. This week, shareholders voted down a $518.6 million take-private offer from Veritas Capital for prison operator Cornell Cos. The price represented a 30% premium to the stock price before rumors of a privatization emerged in the spring. In the United Kingdom on Friday, shareholders rejected a proposed £971 million management-led buyout of realtor Countrywide PLC. And last week, Cablevision System Corp.’s independent board members rejected an offer from the controlling Dolan family to buy the company at a 25% premium. The stock has since been trading higher than the $30 bid price, closing Friday at $30.40.

Clear Channel’s shareholders seem happy to play the high-stakes game of chicken–for now. The company’s largest holder, mutual-fund giant Fidelity Management & Research, has told the company it won’t vote for the transaction now on the table. At least three of the company’s top investors, who together hold about 16% of the stock, have indicated their opposition–a potential problem given that the company needs two-thirds of all shares voted in its favor.

Indeed, Clear Channel’s dissenting shareholders are advocating that the San Antonio company follow some steps from the buyout shops’ own plan: take on a load of new debt while offering more shares of the company’s outdoor-advertising unit, selling some international assets, and using a large tax credit gained during the spin-off of Clear Channel’s concert division at the end of 2005 to sell radio stations tax-free.

“Cablevision is the canary in the coal mine,” said Jeremy Hosking, a partner at London-based Marathon Asset Management, which holds 4.3 million Clear Channel shares and opposes the sale. The “market has decided it won’t sell listed equity to insiders at discounted prices. All the analyst reports say the private equity will be making 23% [annual returns] on their investment. I find 23% a rather attractive proposition, and I want it.”

One of the company’s top five shareholders said the deal has opened investor’s eyes to the value of the underlying company, which management could unlock just as easily while remaining public.

The dust-up is serious business for the Mays family that founded Clear Channel from a single Texas radio station in 1972. Should the deal fall apart, the family is in danger of being driven from the board in a proxy contest this spring. Under the terms of the privatization, Mark Mays, currently Clear Channel chief executive, and his brother Randall Mays, currently chief financial officer, will each receive options for as much as 2.5% of the company, with half those option based on performance. Their father, Lowry Mays, plans to sell his 29 million shares in the company, worth nearly $1.1 billion at the buyout price.

A rejection of the sale could prove a big blow to Clear Channel stock, with one of the buyers suggesting the company’s shares would fall to the mid-$20 range from their current $37.10. Since a committee of independent directors of Emmis Communications Corp. quashed a take-private plan from the chief executive, the Indianapolis company’s shares have fallen 35%.

This person said a disaster was waiting to happen should shareholders keep Clear Channel public and take on the amount of debt used by the private-equity firms. For example, a few bad quarters of results could hurt financial ratios that determine credit ratings. That could in turn raise borrowing costs, and theoretically expose the company to bankruptcy down the line.

The buyers would put in an amount of debt equivalent to 10 times the company’s cash flows–an extremely high load for a publicly traded radio firm.

The risks of such a strategy were illustrated earlier this month by Health Management Associates Inc., which took on $2.4 billion of debt to pay a special dividend in what was billed as a do-it-yourself leveraged buyout. Since then, its shares have fallen about 8%.

Meanwhile, investors have keyed on the recent stock-market gains of Clear Channel Outdoor Holdings Inc., a billboard company 90% owned by Clear Channel Communications and 10% by the public. Since the company announced it was in play back in October, its shares have climbed 35%, largely on the expectation that the parent will have to buy out the minority holders.

In securities notices that should be filed Monday, Clear Channel Communications is expected to say it isn’t required to make that purchase, and could leave the public equity of Clear Channel Outdoor outstanding even as the parent falls into private hands.

Even if it becomes evident the parent company doesn’t have the votes it needs, its board still must recommend the private-equity sale. Otherwise, under terms of the offering, the company incurs a penalty of $500 million payable to Bain and Lee. If the deal falls apart because the company doesn’t win the necessary two-thirds support, Clear Channel is on the hook for a maximum of only $45 million to reimburse Bain and Lee for expenses associated with the failed agreement.

Clear Channel hasn’t formally set a date for the shareholder vote, but people familiar with the matter say it is likely to take place at the end of March. Under Texas law, shareholders who fail to vote will be tallied as voting against the deal.