Shareholders of Clear Channel Communications are fighting with large private equity firms to get more for their shares in a proposed buyout. If the deal is ultimately voted down, all parties will lose.
In November 2006, Bain Capital and Thomas H. Lee Partners won a competitive auction for the takeover of Texas-based Clear Channel with a price of $18.7 billion, or $37.60 per share. The offer received the blessing of Clear Channel’s board of directors and that of the founding Mays family. Shareholders, however, were dissatisfied.
In the month before Clear Channel indicated that it was exploring its strategic options for a sale, its stock was trading at around $30 per share. The offer by the private equity shops therefore would have given shareholders a premium of about 25 percent. Yet shareholders, particularly the two largest, Fidelity Investments and Highfields Capital, believed that the price grossly undervalued the company and said they would vote against the deal. Proxy advisor Institutional Shareholder Services, whose recommendations hold a lot of sway with institutional investors, also came out against the offer, saying it was too low.
Under Texas law, holders of two-thirds of outstanding shares must approve a buyout. This makes getting approval tougher because not only is a super-majority needed, but such issues are typically decided on a simple majority of votes cast, rather than of outstanding shares. In Texas, shares not voted count against the deal. These conditions give shareholders an unusually strong hand in negotiations.
Bain and Lee went back to the drawing board and increased their offer to $39 per share in April, and Clear Channel pushed back the vote on the proposal to May 8. It was then pushed back to May 22 after the private equity team upped the bid again by 20 cents, with the conciliatory alternative offer of 30 percent “stub equity” in the soon-to-be-private company. Stub equity allows incumbent shareholders of a company that is taken private to retain some ownership, and thus participate in the private profits. Clear Channel’s board initially rejected the bid, figuring that if shareholders wanted a price north of $40, it would be a waste of time to postpone the vote yet again. However, this recent offer finally piqued the interest of shareholders, who then pressured the board to push back the meeting again so more negotiations could take place. On May 18, the board accepted the revised offer and delayed the shareholder meeting yet again, to a date that had not been determined when this article went to press.
For the marketplace and for our economy as a whole, there is some benefit to activist shareholders demanding more from their corporate boards. Too often, chummy management and private equity shops collude in sweetheart deals, where the transaction ultimately benefits those parties at the expense of shareholders. On one side of the argument, it is impressive to hear that shareholders are speaking up. They are demanding to be paid for part of the potential value that will inure to the private equity firms.
However, the theory of market efficiency would state that the market fairly prices companies, and therefore the collective voice of the market has already told us what Clear Channel was worth absent a takeover. Under the incumbent management and its long-term strategy, that value was $30 per share. Some dramatic changes would have to happen to unlock the value that the private equity players are seeing. Jonathan Bergman’s article “The Growing Benefits Of Private Ownership” in the January 2007 issue of Sentinel speaks to how this process works.
It is unlikely that a public company, given the pressures of meeting quarterly estimates and typically risk-averse decision-making, is going to enact the radical changes necessary to make the company worth more than its publicly traded value. For Bain and Lee to reap sizable profits from the deal, they are going to have to take sizable risks. Current shareholders therefore should not feel entitled to excess returns without being willing to share that risk.
The most telling fact in this saga is that no other bidder emerged to say, “We’ll pay more for the company.” This was not a privately negotiated price. It was arrived at in a public auction, and no one was willing to pay more than the Bain and Lee group. The recalcitrant shareholders have achieved only the modest success of getting that group to raise its initial bid by $1.60, or about 4 percent, which brought the premium over the pre-offer market price from about 25 percent to 31 percent.
Who wins if the deal goes through? Possibly everybody, because shareholders would receive a premium from the pre-offer price, the private equity buyers would get the opportunity to buy out the company and add value, and the founding family would get to cash out.
If shareholders reject the deal, the most likely scenario is that management will not take dramatic steps to turn around the company, increase earnings and drive the stock price up. The open market will determine the price the company is worth, and in the absence of a takeover bid, that value is likely to be somewhere in the neighborhood of where it was before all this drama.
So who wins if the private equity buyers fail to close the deal? Nobody, really. Clear Channel shareholders would be stuck with the same stock worth $30 with an unpromising future, and the private equity companies would not get the opportunity to take the company private and make the tough changes necessary to unlock its value.