Leveraged buyouts today are frequently won by the first prospective buyer to initiate serious talks with a target, even though many companies, in signing definitive acquisition agreements, instruct their bankers to spend time seeking a better price. These "go-shop" periods rarely trigger competitive bidding, however. Why? Buyout firms pay such astronomical fees to Wall Street -- $15.2 billion last year alone, according to data firm Dealogic -- that banks are loath to break up a big deal by backing a rival bid, insiders say.
Not so for the planned $18.6 billion buyout of radio broadcasting titan Clear Channel Communications. The company began talking to Blackstone Group and Providence Equity Partners in mid-September, a few weeks after hiring Goldman, Sachs & Co. to evaluate strategic alternatives. Before the parties could reach an agreement, though, Blackstone and Providence unexpectedly cut what they were willing to pay for Clear Channel, from $35.50 per share to $35. The company's board then opted for an auction, spurring a series of bids that attracted an extra $1.85 per share, or $1.3 billion, showing that shopping a buyout before a definitive agreement is in place can yield a better result for shareholders.
The auction began on October 25, one week after Blackstone and Providence cut their offer. Goldman set a November 10 deadline for final bids. On October 27, Apollo Management and Carlyle Group offered $36 per share; three days later Cerberus Capital Management and Oak Hill Capital Management said they'd be willing to pay more than $37. Then firms began dropping out, citing lack of time to prepare bids. Carlyle withdrew on November 1. Soon thereafter Cerberus and Oak Hill also quit.
Then on November 13, after receiving an extension from the board, Blackstone and Providence came back with a bid of $36.50; so did Thomas H. Lee Partners and Bain Capital, according to the proxy statement Clear Channel filed in advance of a March 21 shareholder vote on the deal. (Lee co-head Scott Sperling and partner Richard Bressler had asked in mid-October whether the company was for sale, say people familiar with the transaction. On October 18, while Blackstone and Providence were conducting due diligence, Clear Channel CFO Randall Mays told the Lee execs that nothing had been decided.)
The auction process was working, but the board wanted more money. Directors persuaded the Mays family (Randall's brother, Mark, is the company's CEO; their father, Lowry, is its founder and chairman) to forgo $300 million in change-of-control payments they were due to receive in the event of a sale. That enabled buyers to raise their bids; on November 15, Lee and Bain offered $37.60, trumping Blackstone and Providence's $36.85 offer. The board accepted and instituted a 21-day go-shop. Predictably, there were no higher bids.
"There is massive pressure on financial institutions by the LBO firms," says one senior Wall Street banker. "You don't want to get caught fishing around in someone else's deal."
By front-loading the shopping period and holding out for a better price, Clear Channel got Lee and Bain to agree to buy the company for 34 percent more than its market value in mid-August, when it first retained Goldman, and 7 percent more than what Blackstone had bid before the auction. Still, not all shareholders are jumping for joy. Mutual fund giant Fidelity Investments, which owns 11 percent of Clear Channel, and several others plan to vote against the buyout, arguing that the company could have done even better. Their reaction underscores the rising ire of investors who believe that LBO firms are taking companies private at unfairly low prices. If opponents of the deal manage to derail it, buyout firms may soon find it more difficult to take over companies at attractive prices -- with or without the deals being shopped.