The long-awaited buyout of the nation's largest radio station operator, Clear Channel Communications (NYSE:CCU), is in danger of collapse. The deal is supposed to go through with the help of financing from a syndicate of big investment banks, but at this point the banks are balking at providing the funding.

The banks are worried about the risk, which shows weakness and brings larger concerns to the merger and acquisition market. Clear Channel and its acquirers are not taking this lying down, and have already taken actions to force the hands of the lenders. (To learn what companies look for when acquiring a company, see How The Big Boys Buy.)

Banks Balk
The original deal struck 18 months ago is for a pair of private equity shops, Bain Capital and Thomas H. Lee Partners, to take the company private for $19.5 billion, or $39.20 per share. The deal is dependent on the agreement of a consortium of banks, composed of Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), Credit Suisse (NYSE:CS), Royal Bank of Scotland (NYSE:RBS), Deutsche Bank (NYSE:DB) and Wachovia (NYSE:WB). The banks have to provide up to $22 billion in loans to get the deal done.

Now with the credit markets in tatters, the banks are balking at providing that funding. If they backed out the deal would fall apart. This concern started to strengthen Tuesday, and as a result the shares opened 18.5% lower Wednesday at $26.53, a solid 48% lower than the bid. The shares have since come back to slightly above $30, but continue to represent a 30% discount to the deal price.

For those who still think the deal will get done there is a substantial gain to be had from buying at this level. There is also a risk. It is easy to see why the banks would want to back out. The credit markets have changed to make the deal very unattractive for the banks. Once they fund the transaction, they may face substantial write-downs, due to the trouble of repackaging and selling off the debt to the market. For banks that are already facing a litany of write downs, this is just an added headache when they already have a migraine.

Kicking And Screaming To the Courts
Bain Capital and Thomas H. Lee Partners filed a suit against the syndicate for trying to pull out of the deal. A Texas judge ruled just hours later that the banks are obligated to fund the deal, and went so far as to issue a temporary restraining order to prevent the banks from thwarting or interfering with the deal in any way.

Clear Channel claimed this as a victory and professed that the ruling will help the deal get done by Monday, but it seems that is no longer the case. On Friday, the radio station operator conceeded the deal may not close. This was the worst sign yet, as the company reported that, despite the court order, the banks are continuing to hold back financing. The company reported that even if the deal goes through, it can't give an expected date. (For further reading, check out M&A Competition Is Cutthroat For Acquirers.)

Delays past Monday could spark extra fees or threaten the entire deal. This is not a pretty picture for the banks, and the syndicate will do what it can not to fund the deal. The problem is that the banks had already made the commitment. A back-out would be detrimental to the whole merger and acquisition market. The stock is trading at a more than 30% discount to the buyout price, and while on Thursday I was enthusiastic about the opportunity, I feel that the risk just became much higher. I would stay away from the shares.

The Bottom Line
The deal to take Clear Channel private has been facing obstacles as of late. The banks that previously committed to fund the private equity buyout are now dragging their feet, as the credit market makes the terms highly unfavorable for them. The banks may eventually be forced to hold up their end of the bargain; however, the risks of a delay or a complete failure of the deal mean the stock is too risky to recommend.

To learn more about the ups and downs of corporate restructuring, read The Wacky World of M&As.

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  10. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center