Tense negotiations between deep-pocketed private-equity firms and Wall Street banks over the $27 billion buyout of radio giant Clear Channel Communications last night devolved into finger pointing that could sink the deal.
People familiar with the discussions stressed that while talks between the private-equity firms buying the company and the banks supplying the debt for the deal were tense, they had not completely broken down and that there was a chance the transaction could be completed by month’s end.
At issue is the Wall Street banks’ desire to get out of having to commit $22 billion in debt to the buyout. The banks, led by Citigroup, fret they would lose several billion dollars almost immediately if they follow through with the financing.
Private-equity firms Thomas H Lee Partners and Bain Capital agreed to buy Clear Channel about 16 months ago at the height of the leverage buyout boom and have worries that they overpaid for the company, sources said.
If the banks walk away, there will be a “torrent of lawsuits against almost everyone involved,” according to one person involved in the deal.
But the high-stakes poker match is expected to continue for at least another day as the two sides continue to work on the terms of the deal’s financing.
Clear Channel shares took a nosedive in after-hours trading yesterday, falling as much as 25 percent, after The Wall Street Journal reported on its Web site that the two sides had failed to come to an agreement over financing terms.
People close to Bain and Lee maintain that they are still committed to the deal despite a weakened economy and blame the banks for trying to walk away.
Meanwhile, people close to the banks, which also include Morgan Stanley, Deutsche Bank, Wachovia, Credit Suisse and RBS, say the private-equity firms have soured on the deal.
One issue is who would get paid first if the two firms decide to divest some of Clear Channel’s assets, such as regional radio stations or other businesses, sources said. The firms want the ability to use any proceeds from the sales to pay themselves a dividend, while the banks want any cash generated to immediately go to pay down debt, sources said.
The original credit agreement with the private-equity firms does not give the banks a lot of wiggle room to get out of the deal, according to sources who have seen the agreement.
“The only way the banks can get out of this deal now is to somehow force the private-equity firms to walk away,” said one banker involved in the deal. “The only way they can do that is to play extreme hardball on the terms of the debt agreement to the point where the PE firms say we’re out.”
Though Clear Channel is primarily considered a radio company, one source said the group based many of its financial assumptions on the expected growth and performance of the company’s outdoor advertising unit, which ranks as the world’s largest.