Keeping the pressure up


Almost forgotten as Clear Channel, two private equity firms and six banks battle in various courts is Highfields Capital, the hedge fund that stands to be the third largest owner of Clear Channel if the going-private transaction closes. The New York Post reports that the hedge fund is threatening to pull its trading business from two of those banks if they don’t fund the deal.

As of the end of January, Highfields reported to the SEC that it owned slightly over 38 million shares of Clear Channel. It was Highfields that led the investor resistance to the original buyout proposal last year and eventually got the price boosted to $39.20, along with a provision allowing current stockholders to exchange shares for up to 30% of the new, private company, CC Media Holdings. Those shares will be issued on a pro rata basis to all shareholders who want to take part in the exchange, rather than sell for cash, but Highfields will almost certainly end up with the largest piece of that 30%.

Highfields is also not shy about using its financial muscle. It has been an activist shareholders in numerous public companies, just as it was last year in pushing for a better buyout deal at Clear Channel. And as an active hedge fund, it does a lot of stock trading. Currently, according to the Post story, a good bit of that is handled by the trading desks at Citigroup and Deutsche Bank, two of the banks who were supposed to finance the Clear Channel buyout. The newspaper says Highfields has threatened to take its trading business elsewhere if the banks don’t go through with the Clear Channel financing.

RBR/TVBR observation: It probably will not shock anyone to learn that banks are about money. The Post story says Highfields paid Citigroup about 12 million in trading fees last year, but doesn’t offer any estimate for Deutsche Bank. That’s real money, but not as much as those two banks would have to write-down if they do the Clear Channel deal on the original terms. We provided the breakdown the other day, showing that Citigroup and Deutsche Bank would each provide a little over 4.1 billion of the total 22 billion-plus in financing. And, more importantly, each would be stuck with more than a sixth of an estimated 2.7 billion in write-downs.

The financial threat from Highfields is less than the guaranteed loss from going to closing for the banks. Even so, it is a stick to hit them with – and it adds to the pressure on the banks from the court battling in Texas, where the score is currently Clear Channel 2, banks zero. And the stakes there are potentially in the billions, not millions. How much pressure can the banks take before they decide to take the known hit and eliminate future risk?