Tuesday, March 25, 2008

The Credit Crunch's next victim: Clear Channel

In another confirmation that the days of cheap debt are done, the WSJ reported late today that the private equity buyout of Clear Channel Communications is bordering on collapse. Translation: The banks are running for the hills and trying to back out as they continue to hoard cash. This buyout was supposed to be at $39.20/share and cost a total of $19.5 billion. The shares are now trading after hours at $26.10 following the WSJ article.

IMO this deal is dead and its just a matter of negotiating the termination fee to get out of the transaction. You may recall the flurry of activity last summer when almost everyday there was an announcement of a private equity buyout as the DOW soared to 14k. Now as the credit crunch deepens, many of these deals still have not closed, and the banks are now trying to back out as they struggle with meeting capital requirements and higher borrowing rates.

It will be interesting going forward to see how many of these deals get killed. This will not be good for M&A revenues at the investment banks and it leaves companies like Clear Channel in a tough position. Clear Channel now has to rapidly restructure itself from a buyout candidate back to a stand alone company. This could be very disruptive from an earnings standpoint as they try to switch gears.

In other market news, the US dollar is tanking as other countries begin to expect more Fed rate cuts as the consumer confidence report strengthens the belief that the US is in a recession. From Bloomberg:

``The market is taking a reality check: No, nothing has changed,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest asset custodian, with oversight of $23.1 trillion. ``The economy in the U.S. will deteriorate further.''

"Start of `Run'
The dollar's decline against the euro ``appears to be the start of a run'' to a range of $1.60 to $1.625 over the next two to three weeks, according to Andrew Chaveriat, a currency strategist at BNP Paribas Securities SA in New York. Chaveriat, who uses historical patterns to predict currency price moves, included the forecast in a note to clients yesterday. "

This "run" on the dollar could be catastrophic to our economy. Last night Bloomberg was discussing the use of our currency as a carry trade. The last major economy to see this was Japan and look what happened to their stock market(dropped from 38,000-14000 and now sits at 12,600). We seem to be heading right toward the same Japan deflation scenario.

The Fed is basically destroying our currency to save Wall St. If they continue to take junk at the discount window from the investment banks and cut rates then the dollar may crash. The market will not continue to ignore this "magic act" of hiding the losses from bad lending and not restoring trust back into the markets. Until these losses are realized, our economy will continue to suffer and so will our currency.

Goldman also said today that total subprime losses may add up to $460 billion which is four times larger then the losses that have been already written down by the banks. Dow Jones reported last night that Merrill Lynch may take an $8 billion dollar writedown this quarter.

New Home sales # comes tomorrow. The word is this number an annual pace of 578,000 units which would be the the lowest pace since 1995.

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