Much has been made of the internal memo to Clear Channel managers from President & CFO Randall Mays that has been published on the website of the Wall Street Journal. But it doesn’t seem to change much from the hold-the-line-on-spending memo that Clear Channel Radio CEO John Hogan sent out in January. Belts have been tightened and they’ll remain that way until the delayed buyout closes.
Mays’ memo reminds managers that because of certain provisions of the merger agreement, it is “extremely important for us to be as judicious with cash as we possibly can between now and closing.” Potentially, Clear Channel shareholders could be forced to take stock in the new company, CC Media Holdings, if there is an equity gap at closing. As it stands now, the rollover into that new stock is expected to be a voluntary option for current shareholders.
“It is the preference of our board that no one be forced to roll (everyone has the option to roll and the board would prefer that this remain an option rather than a requirement). There is a certain level of cash which we will need to have at closing in order to insure that no one has to do anything that is not of their choosing.
Additionally, the debt provided by the banks to fund the transaction was fixed at the time of signing the amendment to the merger agreement. Thus, any additional cash outlays between now and the deal closing, have to be funded 100% with equity. For those of you that have run levered return models, it is very difficult to make deals attractive when you have to fund them with 100% equity. Post closing this will not be the case and we will go back to our normal procedures so don’t infer anything in this other than there are timing issues with respect to capital before closing,” Mays said in the memo posted by WSJ.
RBR/TVBR observation: This is basically a math problem. In fact, we ran through the math just a few days ago. The parameters for getting the buyout deal to closing are very tight and can’t and won’t be changed. The equity money from Bain Capital and Thomas H. Lee Partners is in escrow. The debt money from the banks is in escrow. The debt assumption is capped. So, Randall is right, any shortfall at closing has to come from somewhere and the contract specifies that if there is still a gap after counting in the voluntary rollovers into the new CC Media Holdings stock, it will be filled by involuntary rollovers.
The anticipated Q4 closing is still quite far off. Even strict penny-pinching may not be enough if the ad markets get even worse before closing and Clear Channel’s revenues fall short of expectations. In that case, there could be a gap to fill no matter what they do. Also, in such a situation, the $36 per share buyout would look pretty good and not many shareholders would voluntarily seek CC Media stock, so they would have to be dragged along unwillingly into the new company.
On the other hand, if the economy turns around before the closing date the $36 per share price may look less attractive and the CC Media option may be oversubscribed. As we noted, it’s all math.
What we will be most interested in seeing, though, is what “normal” looks like at Clear Channel once the closing is done.