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Last Updated: April 1, 2008: 9:58 PM EDT
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Clear Channel fight gets down 'n' dirty, Texas-style

A lawsuit against the banks funding the $26 billion buyout of the radio empire is just the latest episode in a long-running drama.

By Richard Siklos, editor-at-large

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Lowry Mays' Clear Channel radio empire has been clobbered by the digital age.

(Fortune) -- The sale of Clear Channel Communications, America's biggest radio station owner, has rambled and lurched along like some kind of pre-Wright Brothers flying machine - a bicycle with flaps trying to get off the ground. At every step of the sale process that began when a deal was struck in November 2006, there has been turbulence. Just last month, Clear Channel settled a dispute with private equity firm Providence Capital to complete the purchase of its TV businesses.

That seemed to clear the runway for two other private equity firms, Bain Capital and Thomas H. Lee Partners to go ahead with their $26 billion buyout of Clear Channel (CCU, Fortune 500), which also owns a big outdoor advertising business. Well, not so fast: on Tuesday, the flying cycle skittered toward the dirt yet again when, in a fairly striking development, Clear Channel and its private equity buyers sued the consortium of blue chip banks who are supposed to finance the buyout - a lineup including Citibank (C, Fortune 500), Morgan Stanley (MS, Fortune 500), Credit Suisse (CS), Deutsche Bank (DB) and Wachovia (WB, Fortune 500).

The market had been filled with rumors in recent weeks that the Clear Channel deal was on the skids because the PE firms could not arrange financing. On Thursday, Clear Channel warned in regulatory filing that the deal may not close because of the funding dispute.

In their lawsuits, filed in Texas and New York, the private equity shops contend that the financing is set in stone and that the banks want to wriggle out of putting up $22 billion in financing because liquidity troubles in the financial markets have given them "lenders' remorse" (as Bain and Thomas Lee put it in a release). For their part, the banks deny that they've done anything underhanded and are living up to the letter of their obligations.

The suits contend that what looked like a nice piece of business guaranteeing at least $360 million in fees to the banks was shattered by the realization that they would be down $2.65 billion out of the gate when they tried to resell the debt into credit markets that have seized up.

There's a sweeping, epic story here covering two industries being roiled by change: Media and finance. First, media. A decade ago the radio business was flying high in the United States when the market deregulated, allowing companies to scoop up several stations in the same market. No one did it with more gusto than Lowry Mays and his sons Mark and Randall, who built San Antonio-based Clear Channel into a goliath which today has close to 1,000 stations. Over the past few years, though, radio stocks have been clobbered because they are the cousin of two industries being roiled by the rise of the Internet - music and news.

On top of that, there is real prospect of the first advertising recession in years in the United States Clear Channel shares were wobbling at around $30 a share yesterday, more than nine dollars below the agreed buyout price, and less then one-third of their 1999 peak.

Then there's the crisis roiling financial markets. When the Clear Channel buyout was announced, there was pushback from some of the company's big institutional investors, who wondered if the private equity firms - then riding high like radio consolidators once did - were taking advantage of an overly pessimistic view in the stock market. (Indeed, in an atypical plan for a buyout, the Mays, who own 7% of Clear Channel, would continue running it after taking it private. And, despite the fact that its basic business of selling radio advertising isn't growing much if at all, it's a real business where scale can make a difference: more than 90% of Americans still listen to radio in any given week.)

Over the past few months, of course, the view that the PE folks were getting a bargain has evaporated as private equity firms have stumbled amid the credit crunch, and big buyout names like Blackstone (BX), Carlyle and Fortress have been singing the blues. The new storyline is that private equity is in limbo and can't pursue many new deals because financing has dried up. And, now, comes the latest iteration of the story: that even long-in-the-works deals like Clear Channel are in jeopardy because the banks want to walk.

The beauty of this latest twist in the Clear Channel saga is that the Mays are handling it in the best manner then know: Texas-style. That means that in addition to retaining all the fancy lawyers in New York to sue there for breach of contract, the company has also sued for "tortuous interference" in their home court in Bexar County.

And they've brought in a particularly big gun to their side, Joseph Jamail Jr. A billionaire himself, Jamail, 82, is called the "king of torts", and is perhaps best-known for getting an $11 billion jury judgment against Texaco in 1985 for his client, Pennzoil, which alleged that Texaco had sabotaged its efforts to merge with Getty Oil. (As a result, Texaco filed for bankruptcy protection.) His personal web site says "He has been called a savior, a good ol' boy and and SOB." His suit against the banks is seeking at least $26 billion. Out of the gate, Jamail sought, and received a temporary "restraining order" against the banks, which sounds more theatrical than practical - but definitely puts points on the board.

One hopeful outcome, of course, is that some kind of compromise is struck, a trial is avoided, and the Clear Channel buyout finally takes flight. Clear Channel warned in the filing Thursday that "it is unable to estimate a closing date at this time and cautions the market that a closing may not occur." If it crashes, the legal tangle is only beginning. For now, though, it is all a harrowing reminder of how quickly the winds can turn against an industry and how hairy things can get when they do.  To top of page