The Wall Street Journal reports on A1 that the $19 billion private-equity deal reached 16 months ago for Clear Channel has all but fallen apart, apparently because the banks who agreed to finance it have now decided that’s not such a good idea. Thomas H. Lee Partners and Bain Capital Partners, the two buyout firms who agreed to buy the radio-station behemoth, are on the hook or a $600 million breakup fee, which the WSJ says they’ll try to hang on their bankers (who include troubled ones like Citigroup, Wachovia, and Credit Suisse) if they can’t get financing.
The market for debt has collapsed since November 2006 when the deal was reached. That means the banks will immediately lose money if they make the loans or they would have to hold the loans on their balance sheets and have less money to lend for other purposes.
The New York Times on C1 says the banks wanted THL and Bain to put up more equity and agree to stricter terms, but the two refused.
Clear Channel’s problems are the most recent instance of a private equity deal tumbling into court, as the squeeze in the credit markets has disrupted the buyout world. The cheap debt that powered the recent two-year buyout boom has disappeared, forcing the banks to sell those loans and bonds at steep discounts. At the same time, the acquisition business has cooled with private equity firms largely sidelined because they are unable to get financing from the banks.
Always low prices, on debt
The Journal says the banks would lose billions instantly if they finance the deal:
The continuing crisis in the market for leveraged debt means they would have to mark down the value of their Clear Channel loans as soon as the deal closes and book the losses.
Such debt has typically been marked down 15%, meaning the banks could lose $2.7 billion the moment they close the deal. Still, the commitment letters the banks signed when the deal was cut in May make it almost impossible for them to back out of their commitments.
The NYT says Clear Channel and its suitors may sue the banks for failing to live up to their commitments.
Bloomberg puts it nicely:
”Given the latest actions of some of these banks, reputational risk has apparently dropped down on the list of business considerations,” said Roy Behren, a portfolio manager with Westchester Capital Management in Valhalla, New York.
Busted deals from around the globe
In other big deal busts, Brazilian mining company Vale dropped its quest to buy rival Xstrata for about $90 billion, the Financial Times says on the front of its Companies & Markets section. Unlike the Clear Channel buyout, the banks were committed to finance this one, the Journal says on A3, but the deal fell though after commodities stocks, which had been booming for months, fell sharply in the last couple of weeks.
The collapsing consumer
Consumer confidence collapsed last month, reaching a 35-year low. The NYT buries the news on C5 and pooh-poohs its significance:
Fears often prove overblown, of course, and this particular survey, which was released on Tuesday by the Conference Board, has a spotty track record as an indicator. But expectations can often be self-fulfilling: worried consumers are less likely to make the big purchases that help keep the economy humming.
The WSJ puts it on A2, notes that the Consumer Board survey predicts inflation of 6.1 percent in 2009, and says:
The combination of negative factors weighing on the economy “increases the probability that we’re looking at something more sustained and somewhat deeper…as people react to their fears and batten down the hatches,” said Bank of America economist Peter Kretzmer.
A big step down