CCU board endorses boosted bid; Vote delayed


If you've booked airfare to San Antonio tomorrow to vote on the Clear Channel buyout, you'll have plenty of time to stroll the River Walk and enjoy some quality Tex-Mex cuisine. There will still be CCU's annual shareholders meeting, to reelect board members, certify the outside auditors and such, but the buyout vote is on hold.

For the second time, an increase in the offer from Thomas H. Lee Partners, Bain Capital and the Mays family has been endorsed by the CCU board of directors. The latest increase was only 20 cents, to 39.20 per share, but it appears that the more important change is a provision that will allow current shareholders to take stock in the new Clear Channel rather than cash. That offer was initially rejected by the board, but it apparently did the trick with a couple of major holdouts from the 39 bucks offer – Highfields Capital and Fidelity Investments. They and others put pressure on the independent directors to reconsider the cash/stock offer.

CCU announced Friday that the increased bid had been endorsed by the board, necessitating yet another delay in the buyout vote. Because the cash/stock deal is more complicated than the all-cash once, it may take a couple of months to work out the details, send out the new proxies and schedule the vote. But, it looks like this is the deal that will get the shareholder vote past the two-thirds required by Texas corporate law.

RBR observation: The stock instead of cash option is capped at 30% of the new Clear Channel. We would expect it to be oversubscribed, so the issuance of new stock to current shareholders who want it will be on a pro rata basis. Still, Highfields, Fidelity and other big shareholders who really don't want to cash out will be able to convert most of their holdings to shares of the new Clear Channel. That means they will still be on hand to pressure Mark and Randall Mays to increase returns to shareholders.

There is opportunity ahead, but also risk, as summed up by Bank of America analyst Jonathan Jacoby: "Given the plan to use approximately six dollars of debt for every one dollar of equity, the newco equity could realize a fantastic return if the firm value increases.

We estimate that a 20% increase in firm value would more than double the value of the newco equity and turn 39.20 into approximately 42.50. Of course, a 15% decline in the firm value would make the newco equity essentially worthless."