Financing for Private Equity Deals Dries Up

Private equity firms that want to buy Clear Channel Communications are suing Citigroup and other major banks, saying they've backed out of a deal to finance the purchase. In the current credit crunch, the banks once eager to lend money for private equity deals now appear skittish.

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One of the largest private equity deals in recent memory is on the verge of collapse, another victim of the credit crunch.

Clear Channel Communications owns more than 900 radio stations. It was supposed to be sold to two big buyout firms, Thomas Lee and Bain Capital Partners, but Clear Channel says the banks that agreed to finance the private equity purchase are now trying to renege.

NPR's Jim Zarroli has that story.

JIM ZARROLI: It seems like a long time ago now, but it was only last year that the private equity business was booming. Private equity firms were snatching up famous-named companies like Chrysler and Bausch & Lomb, and major banks were falling all over themselves to finance the deals.

Colin Blaydon is a professor of management at Dartmouth's Tuck School of Business.

Professor COLIN BLAYDON (Management, Dartmouth Tuck School of Business): People were competing aggressively for these deals. And so, they were offering evermore generous terms in order to win the deal.

ZARROLI: Fast forward to today - the credit market has tanked, investors no longer want to get involved with these deals. And Bob Profusek of the law firm Jones Day says major banks that agreed to finance the purchases are now staring at potential losses of 80 or 90 cents on the dollar.

Mr. BOB PROFUSEK (Associate, Jones Day): And while that might not be a particularly big deal, if it's a $200-million deal. If it's a 20- or $30-billion deal, that dwarfs the fees that the banks would get out of the deal.

ZARROLI: Facing such big losses, some banks have tried to renegotiate the terms of the deals they once agreed to. Last year, Home Depot had to lower the sales price for its contractor supply unit after banks suddenly balked at the terms they agreed to. And that's what Clear Channel alleges is happening now.

Last September, Clear Channel's shareholders agreed to sell the company to a pair of private equity firms for almost $20 billion. But the deal can't go through without financing, and Clear Channel says that a group of major banks that agreed to do the financing when times were good - banks that include Citigroup, Morgan Stanley and Wachovia - is now dragging its feet. If the merger doesn't close by June 18th, it falls apart, and that would hurt Clear Channel's shareholders. In today's economic climate, it is unlikely they could get the same price again for the company.

None of the players would talk on the record, but Citigroup has issued statements, insisting it's prepared to honor its commitments. Colin Blaydon notes that private equity firms usually settle their disputes behind closed doors. But the Clear Channel lawsuit has brought the normally secret inner workings of the business into the open, and he says there are likely to be more disputes like this down the road.

Prof. BLAYDON: The stakes for these large-cap deals, the potential losses are so large that what was a game of hardball even then has gotten much, much tougher today.

ZARROLI: This week, Clear Channel obtained a temporary restraining order from a Texas judge, barring the banks from doing anything that would hurt the deal. But the company acknowledged in a filing with the Securities and Exchange Commission that the deal could still collapse.

Jim Zarroli, NPR News, New York.

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