Clear Channel to be sold for $18.7 billion

Times Staff Writer

In the latest and biggest of a recent wave of media buyouts, radio giant Clear Channel Communications Inc. agreed Thursday to be purchased by private-equity firms and the company’s founding family for $18.7 billion.

The deal, which also involves the assumption of about $8 billion in debt, ranks as the fourth-biggest leveraged buyout in history. Nine of the top 10 have come this year, the only exception being Kohlberg Kravis Roberts & Co.'s $25.1-billion buyout of RJR Nabisco Inc. in 1988.

For the record:

12:00 a.m. Nov. 18, 2006 For The Record
Los Angeles Times Saturday November 18, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 55 words Type of Material: Correction
Clear Channel deal: An article in Friday’s Business section about the proposed buyout of Clear Channel Communications Inc. listed Warner Music Group among the companies that had been taken private this year. Warner Music was taken private in 2004 but has since returned to the public markets and trades on the New York Stock Exchange.

Traditional media companies have become targets for two reasons: Competition from the Internet has eaten away at their audiences and advertising revenue, causing their stocks to sink. Second, their shrinking but still-strong cash flow makes them able to shoulder the increased debt involved in a leveraged buyout offer.


Taking these companies private frees them from Wall Street’s short-term mentality, conceivably enabling them to invest in projects that may not pay off for several years. Backers of these deals say they are perfect for the old-line media industry, which faces a tough and expensive transition to a digital world, even as it loses ears, eyeballs and advertising revenue to new rivals such as Google Inc.

The winning bid for Clear Channel of $37.60 a share came from the Boston-based firms Thomas H. Lee Partners and Bain Capital Partners. It topped an offer from Providence Equity Partners Inc., KKR and Blackstone Group.

Members of the Mays family, which founded Clear Channel and holds about 7% of the stock, will continue to manage the company, which owns 1,150 radio stations and one of the nation’s largest outdoor-ad businesses. Patriarch L. Lowry Mays will step down as chairman and sell a portion of his stake, taking an advisory role as chairman emeritus. Sons Mark P. Mays, chief executive, and Randall Mays, president and chief financial officer, will remain in their posts.

San Antonio-based Clear Channel also announced separately that it would sell 448 radio stations and all 42 of its TV stations, which together accounted for less than 10% of revenue last year.

Clear Channel’s shares rose $1.24 on Thursday to $35.36.

The deal closed less than a month after rumors of a sale began leaking. There has been some criticism of the process because the Mays family appeared determined to retain control rather than inviting a full-fledged auction.

To address such concerns, the Mayses and company co-founder B.J. “Red” McCombs recused themselves from voting on the deal. The Mayses also agreed to significantly reduce payments they would have received in such a change of control.

Another rival could trump the Bain-Lee bid during a “shop period” through Dec. 7. Merrill Lynch analyst Laraine Mancini said in a report Thursday that bids of as high as $41 a share could emerge.

Given the 37% surge in the stock since early August, many investors may be willing to approve the deal, Bear Stearns & Co. analyst Victor Miller wrote Thursday. Radio broker Peter Handy of Star Media Group in Dallas said the deal was “great news for radio” because the price -- about 12 times annual cash flow -- is significantly higher than where radio properties have been trading. Other publicly traded radio firms should get a boost as a result, he said.

The deal also has implications for a separate auction now underway of Tribune Co., corporate parent of the Los Angeles Times. Thomas H. Lee Partners pulled out of a consortium bidding for Tribune late Thursday, according to a person close to the situation. The two remaining partners, Texas Pacific Group and Goldman Sachs Group Inc., probably will go forward with their bid, the person said. It was unclear whether Bain Capital also would pull out of the Tribune auction now that it has won Clear Channel, in light of federal regulations limiting media concentration.

At the same time, losing out on Clear Channel could ease regulatory concerns for Providence Equity, which is a rival bidder for Tribune, in partnership with Madison Dearborn Partners and Apollo Management.

Detractors of the current buyout craze predict that it will end painfully. With private-equity firms and their investment-bank enablers piling higher and higher amounts of debt on companies, they say it’s only a matter of time before an economic downturn or a change in industry dynamics causes a cascade of failures, wiping out jobs and bondholders who invest in such deals.

“It’s historically reminiscent of the S&L; crisis of the 1980s,” said Leo Hindery Jr., a cable TV veteran who runs a media investment firm in New York.

Standard & Poor’s, the bond-rating firm, Thursday downgraded Clear Channel’s debt to BB-plus from BBB-minus and placed the company on watch for further downgrading.

“Even if the deal does not close, which we believe is a relatively low probability at this juncture, Clear Channel has demonstrated an appetite for a higher level of risk,” S&P;'s Michael Altberg said in a statement.

Other media and entertainment firms taken private this year include Univision Communications Inc., Warner Music Group Corp., Metro-Goldwyn-Mayer Inc. and Reader’s Digest Assn. Inc. -- the latter in a $1.6-billion deal announced Thursday with the private-equity firm Ripplewood Holdings.

Bain Capital Managing Director John Connaughton said companies trying to take innovative approaches need the flexibility of being private because they can’t deliver the quarter-to-quarter consistency in revenue and profits that the public markets demand. “We want to encourage them to think outside the box,” he said of Clear Channel’s managers.

To the winning bidders, Clear Channel’s outdoor advertising business may be its true jewel. The business doesn’t suffer from the same direct competition with the Internet that newspapers face with classified advertising, and, Connaughton said, “You can’t TiVo it.”

Clear Channel’s outdoor advertising has been growing at a nearly double-digit annual rate with even stronger growth possible as the company upgrades to digital displays that can be changed at the flick of a switch, Connaughton said. Digital boards can produce five to eight times the revenue of static boards, he added.

On the radio side, a dual-pronged strategy that Clear Channel rolled out 18 months ago is showing signs of paying off, said Scott Sperling, co-president of Thomas H. Lee Partners. The “less is more” approach involves reducing the number of hourly ad minutes for a better listening experience and shifting from 60-second to 15- and 30-second ads, which generate more total revenue and still can have high impact, Sperling said.



At a glance

Company: Clear Channel

Founded: 1972

Chief executive: Mark P. Mays

Headquarters: San Antonio

Employees: 31,800

Principal businesses: Radio, billboard advertising

Radio stations: 1,150, including Los Angeles FM stations KIIS, KHHT, KBIG, KYSR and KOST, and AM stations KFI, KTLK and KLAC

TV stations: 42

Revenue (3rd quarter 2006): $1.8 billion

Source: Clear Channel