Clear Channel cautions markets; activist shareholders bring slate to Office Depot

By Paul A. Harris

St. Louis, March 28 - Following the latest developments in the merger of the moment, Clear Channel Communications Inc. (NYSE: CCU) closed Friday down 1.35%, or $0.40 per share, at $29.20, after having been up nearly 10% on Thursday.

It wasn't the black flag that Clear Channel Communications Inc. hoisted on Friday, with respect to $19.5 billion LBO of the company.

It was the yellow flag.

In a Friday morning press release Clear Channel stated that representatives of the company and sponsors Bain Capital Partners, LLC and Thomas H. Lee Partners, LP met Thursday.

At the meeting the company and the sponsors confirmed that they were "ready, willing and able" to consummate the LBO. The sponsors also reiterated their willingness to fund their respective equity commitments.

Ready, willing and able, that is, provided that lending banks pony up the financing they committed to back in the halcyon days of easy credit and ever-increasing property values in late spring 2007.

The banks took a flyer on the Thursday meeting, however, according to Clear Channel's release - even though the company made certain the banks received their invitations.

The press release also stated that the agreed to closing date for the merger is Monday, the last day of March.

Clear Channel concluded the release with what amounts to tacit acceptance that the deal won't be completed by that time.

"The company is unable...to estimate a closing date at this time and cautions the markets that a closing may not occur."

Catch 22

An equities analyst who covers the company told Prospect News on Friday that it's beginning to sound like a "Catch 22"-type of situation.

"Clear Channel wants the transaction closed," the analyst recounted.

"The private equity firms appear, at least on the surface, to be willing to close the transaction, but they need the financing.

"The banks have held back on the financing.

"And if the transaction does not get done by the end of the month, which is on Monday, then the banks may be free to not provide the financing.

"It seems odd that the banks could both create the problem and then claim that the problem is a reason for the banks to back out."

Even factoring in recent positive movements in the share price, the arbitrage spread still indicates that the deal would not get done at the $39.20 per share price, the analyst said.

"The odd thing is, last May or June the price on the table at that time was $39.00, having been raised from $37.20.

"Then they came up with $39.20 and provided an option to shareholders to maintain a share in the newly private company because the judgment at that time was that the private equity companies and the banks were stealing Clear Channel just as it was about to break through.

"In the six to nine months it has deteriorated from a scenario where the private equity firms and the banks were perceived to be taking the company away from shareholders at too low a price to a scenario in which the private equity firms and the banks want out because of the credit crunch."

The analyst said that $39.20 per share looked like a good price based on radio multiples at the time.

"It may have even seemed conservative based on revenue and earnings.

"But a funny thing happened along the way: radio and revenues came under some pressure, and they haven't rebounded very much.

"And on top of that there is a credit crunch.

"So of course the environment is different.

"But the environment was bound to be different, for better or worse," the analyst insisted, reiterating that the commitments each party made with respect to the LBO deal were "binding" commitments.

Activism sans enthusiasm

Elsewhere on Friday, activist holders of Office Depot, Inc. common shares submitted a pair of nominees to the company's board, asserting that Office Depot continues to underperform its competitors.

The activism, with an eye to shareholder value, apparently failed to spark confidence among investors, however.

Shares of Office Depot (NYSE: ODP) ended the day 3.55% lower at $11.13, giving up $0.41 on the session.

An analyst who covers the company was not surprised.

"Confidence levels in turnarounds right now are at a low," the analyst said.

"That's why investors are not attributing a premium to announcements like this."

In a Friday press release, Woodbridge Equity Fund LLLP and Levitt Corp. (NYSE: LEV) urged Office Depot shareholders to elect Mark Begelman and Martin E. Hanaka to Office Depot board.

Begelman is the former president and chief operating officer of Office Depot. Hanaka is the former CEO of The Sports Authority, Inc.

Woodbridge and Levitt want their slate to displace Office Depot director candidates David I. Fuente and chairman and CEO Steve Odland.

"Office Depot's recent statement that it has a 'long-range strategic plan' offers nothing new," Woodbridge asserted in the Friday release.

"While Office Depot's shareholders have heard before many of the promises included in the company's turn-around plan, we have seen little in the way of results. For instance, Office Depot has underperformed its top competitor, Staples, on virtually all key retail metrics over the last several years while operating in the same macro economic environment. Office Depot's performance leads us to question not only the substance of the company's plan, but also whether the current board and management offer the right leadership to take this company forward."

The analyst told Prospect News that Woodbridge is a relatively new shareholder that owns around 1% of the company.

The source added that Office Depot has been performing poorly relative to its peers.

"They have had some internal issues based on some acquisitions they've done that haven't gone well," the analyst said.

"That and some internal turnover that has put them behind the curve a little.

"In light of this macro environment, those circumstances are becoming more pronounced."

Plenty of paperclips

The analyst said that Office Depot is a depressed company that has lost some of its competitive advantage in a sector that is vulnerable to an economic downturn.

"Small business creation has gone into the tubes," the analyst said.

"So Office Depot is not realizing any business from the creation of new small businesses.

"Also, the existing customers aren't hiring as extensively, and in some cases they are actually letting people go. So the demand on the office supply cabinet is diminished, and they are ordering less, and ordering less frequently."

The source also covers Circuit City Stores Inc., and recounted that recent shareholder activism in that company also failed to inspire a pop in the share price.

"The confidence level of investors that some new group could come in and turn the business around is very low right now, given the business environment," the analyst said.

"People are realizing that the turnaround does not hinge on some new name coming in and righting the ship."

Elsewhere in the office supplies space, shares of Staples, Inc. (Nasdaq: SPLS) closed 0.97% lower on Friday, down $0.22 per share to close at $22.38.

Meanwhile OfficeMax Inc. (NYSE: OMX) gave up 2.59%, or $0.51, to close at $19.16.

In reatil away from office supplies, shares of Circuit City Stores, Inc. gave up $0.22, or 5.29%, to close at $3.94.

Friday's session saw all three major U.S. indexes drop by 0.7% or more.

Of the Dow, the S&P 500 and the Nasdaq the latter dropped the most: the Nasdaq ended 0.86% lower to close at 2,261.18, down 19.65.

The S&P 500 closed down 0.79% at 1,315.22, lower by 10.44.

The down gave up 86.06, or 0.70%, to close at 12,216.40.

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