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Management buy-outs remain laced with potential conflicts and should be handled with extreme care. But Clear Channel partially addressed some of the issues in its $27bn sale to financial sponsors. First, there was an (admittedly, very swift) auction. Management did not become too wedded to the original bidders. In fact, a competing consortium of Bain Capital and Thomas H. Lee won. Second, senior executives who are part of the deal are not taking their full change-of-control entitlements. Presumably, they will still do very nicely and will then load up with new incentives in the buy-out vehicle, but it is a step in the right direction.
As for external shareholders, they get their usual premium – this time about 25 per cent over the three-month average. It is not a knock-out price. After all, Bank of America calculates Clear Channel’s top-notch radio assets are going for about 10.7 times next year’s earnings before interest, tax, depreciation and amortisation. That is below some recent sales of station packages. And Clear Channel’s new owners will take advantage of the mismatch by selling some non-core stations.
But Clear Channel is a huge bite. In effect, the bidders are saying that the public markets are too bearish on the outlook for slow-growing radio advertising and are willing to take a more optimistic view. Such a contrarian attitude paid off handsomely when they bought Warner Music. The rest of Clear Channel’s value is its 90 per cent stake in the separately listed, and thriving, outdoor advertising business. That is a less controversial bet. The big question is what happens to minority investors. The huge share price rise in recent months assumes that they will also be bought out. That is likely. But it does open up the risk of serious disappointment.