Take-Privates Turn Suddenly Problematic

The days of easy delistings may be over.

In a number of high profile public-to-private transactions, including the agreement by Bain Capital and Thomas H. Lee Partners to acquire Clear Channel Communications Inc. and the proposed LBO of ElkCorp by The Carlyle Group, buyout firms have faced either shareholder opposition or competing bids (see table, page TK ).

“The dynamic today is a lot different than it was just a few years ago,” said Chris Young, director of research at proxy consultant Institutional Shareholder Services. “People know we’re in a buyout boom and activist investors are very comfortable taking a public stance to get more money.” Young added, “Shareholders today realize that the private equity guys are smart, that they are able to get great returns, and a growing number of them want a piece of that, too.”

Clear Channel (NYSE:CCU) originally announced its $26.7 billion take-private agreement with Bain Capital and TH Lee on Nov. 16, 2006. The firms struck the deal at $37.60 per share, a 25 percent premium over the company’s average stock price for the 30 trading days ended Oct. 24, 2006, but a smaller 10 percent premium over the closing price the day before the deal was announced.

But late last month, Fidelity Management & Research Co., the company’s largest shareholder, reportedly said it would vote against the deal in its current incarnation. A “no” vote from Fidelity, which owns almost 11 percent of Clear Channel, would spell serious trouble for the buyout team. Two-thirds of shareholders are required to approve the deal. Making matters worse for the buyers: Shareholders that abstain are counted as “no” votes.

On Jan. 29, Clear Channel began mailing proxy materials in favor of the $37.60 per share take-private to shareholders for approval. It has scheduled a shareholder meeting for March 21 to vote on the deal. As of press time, Clear Channel shares were trading at $36.31 per share, just 3.4 percent shy of the proposed take out price. The narrow spread led Bank of America Analyst Jonathan Jacoby to surmise in a research note that Clear Channel investors may be expecting a sweetened offer to come in at around $40 per share.

Meanwhile, Carlyle finds itself in a slugfest in its proposed take-private of roofing products manufacturer ElkCorp (NYSE:ELK). The Washington, D.C.-based buyout shop is battling strategic acquirer Building Materials Corp. of America for the company. To date, the original proposed delisting price for ElkCorp of $1 billion has ballooned to about $1.15 billion. Building Materials Corp. at press time seemed to be the frontrunner.

Carlyle first agreed to acquire ElkCorp in mid-December for $38-per share. That represented a premium of about 50 percent over the company’s closing share price on the day before it announced it was in play.

Later that month, Building Materials Corp. entered the picture with an unsolicited, $40-per-share offer for ElkCorp. Despite the fact that ElkCorp’s board of directors urged shareholders to reject the offer, Carlyle fired back with a $40.50-per-share offer. When Building Materials Corp. raised its bid to $42 per share a few days later, Carlyle again responded, this time matching the amount. And again ElkCorp stuck to its agreement with Carlyle.

But as of press time, Carlyle had been topped yet once more—this time by a $43.50-per-share offer from its strategic competitor. That amount proved enough to buckle ElkCorp’s loyalty to Carlyle. On Jan. 29, the company served notice that if Carlyle didn’t come forward with a higher offer by Feb. 5, ElkCorp would terminate the deal agreement with the LBO firm. If ElkCorp did so, it would owe Carlyle a $29 million break-up fee.

After a run of windfalls on their take-privates, 2007 has started out as the year that buyout firms are consistently challenged by shareholders, strategic bidders, and even other LBO firms on their take-private attempts. No longer is a signed agreement a sure thing.

Said Gregg Feinstein, managing director and co-head of M&A advisory work at Houlihan Lokey Howard & Zukin: “You have to try to balance your objective of acquiring the company at the most attractive price possible with the odds that another party is going to see that there’s still value left on the table.”—A.N.