How Clear Channel Will Change Deals
When credit was easy, private equity's multibillion-dollar buyout frenzy was like a great party: The champagne was flowing and no one was too concerned about who was picking up the tab.
After the summer's credit crunch, the party ended. Some deals collapsed. One that may survive is the buyout of the radio-station chain Clear Channel Communications after the private equity buyers and six banks reached a settlement this week over $22 billion in financing.
In the sober light of today, are there lessons for dealmakers from Clear Channel?
Yes, lawyers say.
"We need to look at ways to get the financing lined up and locked in sooner—potentially right away, right after or before the merger agreement," says Marilyn Sonnie, a partner with the New York office of Jones Day, who advised Harman International on its failed buyout with Kohlberg Kravis Roberts & Co., which was terminated last August.
In the case of Clear Channel, the financing for the deal was memorialized in a May 2007 commitment letter that left open many terms, heading toward a closing.
By late fall and winter, those open terms, according to Clear Channel and the two private equity firms sponsoring the leveraged buyout, became an opportunity to inject "poisonous terms" to jettison the financing deal. Two lawsuits in New York and Texas followed.
Defending the lawsuits, the six banks, led by Deutsche Bank and Citigroup, were put in the bizarre position of arguing that their standard operating procedure—the use of a commitment letter to memorialize financing—could not be enforced.
The New York case sought to hold the banks to $22 billion in financing—"specific performance" in the legal jargon....
