San Antonio – In the current frenzy of eye-popping private- equity offers, sometimes a buyout isn’t exactly a buyout.
Witness the latest deal for radio and billboard giant Clear Channel Communications Inc., which offers cash but also allows up to 30 percent of public shareholders to stick around and hold part of the privatized company. A similar deal was reached in April for sound-equipment maker Harman International Industries Inc.
Such deal structures are more common in Europe, but in the U.S., where private equity pays a premium partly to avoid dealing with public shareholders, the use of so-called “stub equity” remains rare. It’s not likely to become widespread even in the current fit of dealmaking, but some industry watchers say it could become more common.
“Here’s a way of sweetening the pot a little bit and apparently appeal to a desire on the part of shareholders to share the upside,” said David Brophy, director of the Center for Venture Capital and Private Equity Finance at the University of Michigan’s business school.
According to Dealogic, $265 billion in U.S. private-equity buyout deals have been reached this year, potentially on pace to beat last year’s smashing $422 billion in announced deals. The vast majority involve cash.
Because the amount is more than the stock’s recent value, shareholders usually gladly take the money and run after a deal gets the board’s blessing, but some shareholders, particularly institutional ones, have become wary that private-equity firms are getting steals on companies that have been beaten up by the public markets for management missteps or other issues that can be resolved with patience.
“Larger shareholders are starting to stand up and say, ‘We think there’s more upside or there’s more value there,”‘ said Steven Bernard, director of merger and acquisition market analysis at Robert W. Baird & Co.
That’s exactly what happened in the Clear Channel deal, which appeared destined to fail until the equity group led by Thomas H. Lee Partners LP and Bain Capital Partners LLC offered to allow up to 30 percent of shareholders to stay instead of taking the $39.20 a share in cash under the $19.45 billion deal.
The shares, which won’t trade on any exchange, will be registered with the Securities and Exchange Commission, and shareholders will have the right to sell the stock over-the-counter whenever they want.
Institutional shareholders pushed hardest for the option of taking shares in the new company, but any shareholder can choose the option under the deal.
