Friday, May 4, 2007
It now appears that the tortured $26 billion buy-out offer for Clear Channel Communications, Inc. by a private equity group comprising Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. is heading towards an ignominious death. Yesterday, Clear Channel's board of directors announced that tabulated proxies received currently reflect a vote against the merger of more than the required 1/3 of the outstanding shares necessary to defeat the merger proposal under Texas law (where Clear Channel is organized). The actual meeting will be held on May 8, 2007. A history of the deal is on Dealscape here. So, I thought it was time to now look at some lessons that we might be able to learn from the (probably) failed transaction.
1. The Ephemeral Nature of Go-Shops. The Clear Channel agreement had a 50-day "go-shop". Under the provision, Clear Channel could solicit proposals for alternative acquisitions for a 50-day period after the execution of the merger agreement. This is the third big management buy-out transaction in a year which had the provision and in which no subsequent bidder emerged (the other two were Columbia HCA and Freescale: see their announcement press releases here and here). In light of this, investors are increasingly likely to see "go-shop" provisions as cover for unduly large break-up fees and the significant advantage and head-start provided by management participation.
2. The Coming Hedge Fund/Private Equity wars. Mutual and hedge funds were leaders in the fight against the Clear Channel bid, led by by Clear Channel’s major shareholders, Fidelity Investments and Highfields Partners. The role of investment funds, particularly hedge funds, in private equity/management buy-outs is likely only to increase as more and more hedge funds invest in equities in their hungry search for value (see a related Financial Times article here). This is more likely to result in conflict between the two groups and a more vocal minority shareholder voice in these transactions.
3. The Stink Stays on a Bad Deal. Yesterday, the Clear Channel board of directors rejected a proposed increase of $.20 per share in offered consideration made by the private equity group. Clear Channel justified the rejection since it would delay yet again the currently scheduled May 8, 2007 shareholders meeting and tabulated proxies already showed that the merger proposal would not be approved. In their proposal yesterday, the private equity group also offered to permit the current shareholders to receive up to 30% of the outstanding shares of the newly private company. This is a mechanism that Harman International is using in its own buy-out (see my post on this here). It might have worked with Clear Channel initially, but by the end of the deal there appeared to be so much bad blood that it was likely perceived only as a gambit for the private equity group to delay a losing vote.
4. Law Matters. Under Texas law (TBCA sec. 5.03), the affirmative vote of the holders of two-thirds of the outstanding shares of Clear Channel entitled to vote were required to approve the Agreement. If Clear Channel were organized in Delaware it would have only been a majority of those required to vote thereon (DGCL sec. 251). This made the private equity group's bid much tougher, and it may have changed the result.
5. Know your Financial Advisers. Both Goldman Sachs & Co. and Lazard Frères & Co. LLC, provided fairness opinions to Clear Channel opining that the initially offered consideration was fair from a financial point of view. Goldman was the primary financial adviser; Lazard was hired in addition to Goldman, because Goldman was conflicted in the transaction. Goldman also agreed to provide financing to the private equity group to make the acquisition. The fact that the price was heavily criticized highlights the limitations of a fairness opinion. It is the practice of subjective valuation and cannot predict the highest price that can be paid (for more see my article on fairness opinions here). More troublesome is that Clear Channel's primary adviser on the deal, Goldman, was heavily conflicted; they had a clear stake in seeing the private equity group acquire Clear Channel at the lowest price possible in order to make the repayment of Goldman's loan easier. And while everyone knew what was going on, you still can't help but wonder if it made a difference.
But don't feel too bad for the losing private equity group. According to the merger agreement, even if Clear Channel's shareholders vote against the merger, the group is still entitled to be reimbursed by Clear Channel for its fees and expenses up to $45 million.