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Clear Channel Deal On the Ropes


Financing falls through after banks spooked by hard-to-sell debt.


The credit crunch has wrapped its tentacles around yet another victim.

The Wall Street Journal
reports private equity firms Thomas H. Lee Partners and Bain Capital are in talks to scrap their $19 billion buyout of Clear Channel Communications (CCU). Publically, both the company and its suitors say the transaction is on track to close next quarter. Privately, the buyers are heading for the exits.

The deal is likely to go the way of other failed takeover attempts, like J.C Flowers' and Bank of America's (BAC) bid for Sallie Mae (SLM) and KKR and Goldman Sachs' (GS) run at Harman International Industries (HAR). The trouble isn't collecting equity, it's the debt.

Private equity firms saddle their targets with loans, which are then typically sold to big banks and hedge funds. But turmoil in the credit markets has crimped investors' appetite for new assets. The banks that had agreed to finance the Clear Channel deal -- Citigroup (C), Morgan Stanley (MS), Deutsche Bank (DB), Credit Suisse, Royal Bank of Scotland and Wachovia (WB) -- have little room on their balance sheets for more loans. As a result, Bain and Thomas Lee can't raise enough money to complete the transaction.

The deal's imminent collapse highlights the disconnect between buyers and sellers of debt. By most measures, Clear Channel is a good credit. It's the nation's largest radio broadcaster, and despite facing headwinds of a recession, the company still posted profits of almost one billion dollars last year. But even if banks wanted to buy the bonds issued to finance the purchase, they wouldn't be able to.

Losses on mortgage-backed securities and writedowns on loans tied to other botched mergers have forced banks to hoard capital. New investments are the least of their worries, as they struggle simply to stay above water.

Furthermore, the lack of demand and glut of supply stemming from last year's buyout binge means new debt is increasingly difficult to value. Buyers are demanding prices that make no economic sense for the issuers. Private equity firms must choose between selling the bonds at a huge loss or eating a break-up fee. Neither option is pleasant, but as credit markets continue to seize up, there are precious few easy decisions.

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