The latest skirmishes between the banks and potential buyers of Clear Channel are raising expectations that the lenders will have to come up with $22bn in debt financing for the buy-out, people involved in the deal said.
There are two parallel legal cases stemming from the November 2006 deal under which Bain Capital and Thomas H Lee & Partners agreed to buy the Texas company, which owns radio stations and outdoor advertising sites.
One, filed in New York by the private equity firms, would compel the banks to make good on their agreements to fund the deal. Clear Channel filed the other in its home state, alleging that the banks acted improperly and asking for damages of $26bn.
The banks offered to settle their legal disputes with the buyers on Tuesday through binding arbitration – an offer that the buy-out firms spurned.
Wall Street and hedge fund traders betting on whether a deal gets done interpreted the banks’ offer as a sign of weakness.
The Clear Channel buy-out was agreed at a time when credit was widely available for deals and Wall Street banks and private equity firms enjoyed a mutually profitable relationship. That dynamic has changed as credit markets deteriorated.
Hanging in the balance in the Clear Channel battle is responsibility for a $600m break-up fee. Both the banks and private equity firms are also eager to avoid being seen as the cause of the deal’s collapse.
The sides are expected to face off again today in a New York court, where a judge will hear pre-trial arguments
People familiar with the situation said that when the banks originally balked at providing money to the private equity firms, they anticipated a ritual protest such as a suit forcing them to pay the $600m break-up fee. But they assumed the two firms would give up on the deal, based on the rich price that Bain and Lee were paying.
“The banks thought that they were giving the sponsors a way out,” said one person familiar with the thinking of the buy-out firms.
However, the two firms seem wedded to their deal. One reason is that they are only providing equity equal to 13 per cent of the deal, as opposed to the usual 30 per cent.
The banks and buy-out firms had agreed that legal disputes would be settled in New York. They are trying to get the Texas case moved to New York.
“The banks have always been prepared to fund the acquisition consistent with the terms of the commitment letter,” the lenders said.
“By accepting our offer to fund on terms to be determined in binding arbitration, Bain and TH Lee have it within their power to guarantee that their acquisition closes.
“By rejecting our proposal, Bain and Lee are placing the transaction at risk.”