A “Public” LBO for Clear Channel

In an unusual and clever move, Clear Channel shareholders – if they choose, will become part of a so-called two corporation merger.

Clear Channel Communications Inc. recently announced that the company, the sponsors of its long-running leveraged buyout, and the financiers of the LBO, have entered into a settlement agreement with respect to various lawsuits filed in New York and Texas related to the buyout. The settlement agreement envisions an alteration of some of the details of the previously-announced merger while retaining its basic contours.

At the end of the day, this particular LBO will be unlike any other we have observed in recent years: In this transaction, the public shareholders of the target (Clear Channel) will be afforded an opportunity to become part of the “sponsor group” because such public shareholders will be permitted, if they so elect, to acquire up to 30 percent of the stock of the new corporation formed to effect the buyout.

“Two Corporation” LBO

In the words of authors Professor Martin Ginsburg and Mr. Jack Levin, the transaction will be structured as a so-called “two corporation LBO.” (See Ginsberg and Levin, Mergers, Acquisitions and Buyouts, Paragraph 14.02.) As a result, the sponsors — Bain Capital Partners and Thomas H. Lee Partners &#8212l will form a new company via a reverse merger, called CC Media Holdings, Inc. (CCM), and the new company will obtain equity financing.

To be sure, CCM will form a subsidiary (Mergerco) and Mergerco will procure debt financing, and immediately thereafter, merge with and into Clear Channel. The old Clear Channel shareholders, in turn, will receive in exchange for their stock, a combination of cash and shares of CCM. The total number of Clear Channel shares that may elect to receive shares in CCM will make up 30 percent of CCM’s equity and is expected to be approximately 30 million shares, , according to a press release issued by the company.

These shares will have a total value of approximately $1.1 billion. The terms of the amended merger agreement provide that no shareholder (of Clear Channel) will be allocated more than 11,111,112 shares, representing an estimated 11 percent of the outstanding capital stock of CCM immediately following the closing of the merger. In limited circumstances, the Clear Channel shareholders who elect to receive some or all cash consideration, on a pro rata basis, will be issued shares of CCM in exchange for some of their Clear Channel shares up to a cap of $1 per share.

For tax purposes, here is how the transaction will be viewd: To the extent Mergerco borrows the funds to pay off Clear Channel’s shareholders (such that Clear Channel becomes liable for such debt upon the merger of Mergerco into Clear Channel), the transaction will be treated as a redemption by Clear Channel of its stock. (See Ginsburg and Levin, supra and Revenue Rule 78-250, 1978-1 C.B. 83.) Further, to the extent that CCM borrows money or raises equity capital to pay off Clear Channel’s shareholders, the transaction will be treated as an acquisition — by CCM of Clear Channel’s stock by means of purchase.

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