Just when you thought all those interminable articles about fiendishly complicated Texan law suits and punch-ups between banks and buy-out firms had dried up, the “Clear Channel syndrome” has reared its ugly face again.
This time it’s Canada, where there are renewed signs of wobbles in the C$34.8bn mega-buyout of telco giant BCE.
The resolution in the US last week of the bitter dispute between banks and buyout firms over a $17.8bn deal to buy Texas-based Clear Channel had prompted predictions of a green light for the BCE buyout. When warring sides agreed to proceed with the Clear Channel buyout, Lex noted:
In spite of strains on their balance sheets, the banks financing the Clear Channel deal - three of whom are also involved in the BCE buy-out - have chosen to proceed rather than fight a court battle. That is unambiguously positive.
But while the chance of outright derailment of the deal seemed small, price was a different matter, added Lex. Keeping the banks on board with Clear Channel required reduced gearing and a final price cut of 8 per cent. BCE’s proposed leverage multiple is lower, but the total $34bn of debt required is “enormous”. Given the high price offered for BCE - the buyers are paying 19.4 times 2008 earnings - “merger arbitrageurs should beware jumping in at this point”, Lex concluded.
Sure enough, a week after banks and buyout firms finally agreed to fund the Clear Channel buyout, the New York Times suggested the BCE deal was unravelling as the banks demanded a higher interest rate and more protections on their loans to fund the buyout.
The report itself sent BCE shares sliding more than 5 per cent in New York on Monday to $36.78 (Canada’s markets were closed for Victoria Day) - well below the C$42.75 a share that a group of buyers agreed to pay nearly a year ago.
In a grim echo of Clear Channel, the banks backing the deal, led by Citigroup, Deutsche Bank and Royal Bank of Scotland, sent revised terms to the consortium of buyers far exceeding the original terms, noted the NYT, adding: “Some bankers in the BCE group also involved in Clear Channel, including Citi, Deutsche and RBS, even made explicit comparisons to the Clear Channel deal.”
As part of their legal briefs, Clear Channel’s buyers said that one Deutsche executive joked to a Citi banker that they should “just slap a (redacted by banks) logo” on materials for a Clear Channel meeting and “send them up to Providence” — a reference to the banks’ apparent efforts to also escape their commitment to finance the BCE deal. Such evidence, warned the NYT, “may complicate banks’ legal defenses should the dispute head to court”.
So what next for BCE? Analysts and investors in Canada have speculated that the deal, scheduled to close by June 30, may be repriced.
A meeting between the banks and buyout firms is set for Wednesday in New York, where the two sides hope to hammer out new terms, according to the Wall Street Journal. While people involved warn it might be “weeks” until the issues are resolved, the tone in the BCE talks is “less hostile than those about Clear Channel”, and both sides believe BCE’s agreement is likely to close without ending up in court, adds the Journal.
Heidi Moore offers five reasons not to freak out - BCE is different from Clear Channel, not least because we’ve all seen how the process plays out. Will the deal get done, a la Clear Channel? DealJournal, cites Mark McQueen at Wellington Financial blog, saying yes it will — just at a lower price:
For BCE’s Board to ‘just say no’ [to a lower price] would be to almost guarantee that the deal will fall apart, sending BCE shares on a one-way trip to the sub $30 range. BCE’s Board won’t be able to justify their ‘fiduciary obligation’ under that scenario.
