Clear Channel's murky outlook

(Fortune) -- Even as Clear Channel's day in court draws near, the broadcast and advertising conglomerate's $20 billion privatization deal appears less and less likely.

Clear Channel's prospective buyers, Bain Capital Partners and Thomas H. Lee Partners, are waging legal battles in New York and Texas, in an attempt to force financiers - Citigroup (C, Fortune 500), Credit Suisse (CS), Deutsche Bank (DB), Morgan Stanley (MS, Fortune 500), Royal Bank of Scotland and Wachovia (WB, Fortune 500) - to fund the deal as they promised more than a year ago. The private equity firms charge that the banks are reneging on their commitment to provide financing. A trial date has been set for June 2.

But if recent history is a guide, Clear Channel's effort to privatize is doomed. Over the last 12 months, many deals have gone under as they attempt to navigate through the rocky straits of the credit crunch. 3Com, Acxiom, Alliance Data Systems, PHH Corporation and Sallie Mae have all been on the receiving end of thwarted private equity deals since the credit markets began to tighten last summer.

"Clear Channel wants to get deal done, but it's hard to envision a settlement that they buy into," says Steven Davidoff, professor of law at Wayne State University Law School. "They would have to agree to reduce the price. But why would they do that?"

The Clear Channel deal is unraveling amid a slowdown in radio advertising this year, as well as the credit crisis and the cooling economy that are hurting businesses across the board. On Friday, the conglomerate reported that its earnings for the first quarter of 2008 rose 4 percent to $800 million, or $1.61 per share. But the quarter included gains from the sale of an advertising company. Not counting those gains, Clear Channel's earnings for the quarter were 19 cents per share, below Wall Street's consensus expectation of 21 cents per share.

Revenues at the company's radio unit fell 4 percent to $769 million, while sales at its outdoor advertising unit rose 12 percent to $775 million. Clear Channel's outdoor division - with half of its operations in Europe - will be key to the company's ability to fight off sluggishness in 2008. The outdoor division, which sells space on billboards, is faring well thanks to a somewhat healthier economic climate in Europe, as well as advantageous currency exchanges. Indeed, in the first quarter, Clear Channel's businesses combined saw revenue rise 4 percent to $1.56 billion, compared to $1.50 billion in the same period a year ago.

Even though Clear Channel missed its earnings target for the first quarter, it's possible that the company can gain momentum - even in the midst of radio advertising cutbacks. For the full year, Stanford Group analyst Fred Moran projects that Clear Channel's radio revenue will fall 4 percent to $3.3 billion while revenue from the company's outdoor advertising unit rises 11 percent to $3.64 billion. In the end, Moran expects Clear Channel's overall operating income to remain virtually unchanged from 2007, at $2.27 billion. What that means is that Clear Channel is likely to do no better - or worse - than its media peers.

Over the last year, Clear Channel's (CCU, Fortune 500) shares have fallen nearly 18 percent. The company's shares currently trade at around $30. Should Clear Channel's name join the list of failed privatization deals, its shares would likely fall into the mid-$20 range, according to Moran. As a result, he, and many of his peers have a "hold" rating on Clear Channel.

Analyst Jim Boyle at CL King & Associates is going against the tide of doubters. He reiterated his "strong buy" rating on Clear Channel recently. He takes heart in small victories the private equity partners have eked out over their bankers, who have called to dismiss the case in recent weeks. He wrote in an e-mail to Fortune that "as the legal maneuvering continues... Clear Channel's management and its private equity buyers appear to be winning more of the Texas and New York rulings than the banks, to date."

Clear Channel's management is less encouraged. "The Company is unable to estimate a closing date and is not certain that a closing will occur," read a sentence in the company's quarterly earnings release Friday.