Clock ticking for buyouts


A few months ago private equity buyouts were all the rage. Univision had been bought, Clear Channel and Cumulus Media announced private equity buyout deals and Tribune announced a going-private twist that will have Chicago billionaire Sam Zell and a new Employee Stock Ownership Plan buyout the public shareholders of Tribune Company.

Then something unexpected hit – something unrelated to the private equity business – a credit crunch brought on by major write-offs by big investment funds for their plays in subprime mortgages. Clear Channel and Tribune had planned to close their buyouts by the end of this year, but Wall Street has become cautious. There appear to be no impediments to winning regulatory approvals of the Clear Channel buyout and it has already been overwhelmingly approved by shareholders, but the company’s stock has been trading more than five bucks below the 39.20 buyout price, obviously based on financing fears. If the buyout doesn’t close by New Year’s Eve, shareholders will begin receiving interest to be paid at closing. It’s not just financing fears affecting Tribune’s stock price, but FCC Chairman Kevin Martin holding up needed crossownership waivers to push for approval by fellow Commissioners of his proposal to dump the rule for the top 20 markets, which would eliminate the need for most of the Tribune waivers.

Tribune’s stock has been trading more than four bucks below the 34 bucks buyout price, which will also begin accruing interest come New Year’s Day. Cumulus Media’s buyout proposal is the newest of the bunch and isn’t expected to close until early 2008. The shareholders vote has not yet been scheduled and there don’t appear to be any regulatory issues. What has made Wall Street nervous about the buyout is that the private equity fund involved, alongside the Dickey family, is run by Merrill Lynch, whose CEO was recently pushed out after the company took huge loan write-offs. Cumulus’ stock has been trading more than two bucks below the buyout price of 11.75 per share. 

RBR/TVBR observation: Who said arbitrage was easy? Despite indications that the financing is firm for the Clear Channel and Cumulus buyouts, Wall Street is pricing significant risk into their trading prices. It is highly unlikely that Thomas H. Lee Partners and Bain Capital will try to renegotiate the Clear Channel price, since they had to bid it up to win shareholder approval. So it looks like easy, short-term profits to buy the stock well below 39.20 and wait for the closing.

But if the buyout somehow does crater in this turbulent credit market, who knows how low the stock price could fall? The Cumulus buyout is moving ahead, but how much worse could the credit situation become before it is scheduled to close? And Tribune really carries a big "if" for speculators. What if the FCC just sits and does nothing – no rule change and also no action on waivers? Step two of the two-part buyout could just stay in limbo indefinitely.