Hicks Muse sell Clear Channel stake

After investments ranging over 11 years and three private equity funds, Hicks Muse has finally exited its holdings in Clear Channel, resulting in a loss for its Fund IV investors.

Hicks Muse Tate & Furst is implementing a final exit of its holdings in publicly traded radio station and entertainment conglomerate Clear Channel Communications, according to numerous sources.

Investors in both Hicks Muse Fund III and Hicks Muse Fund IV will see a return of capital, although the considerations paid to each set of limited partners vary, reflecting the differences in age and basis among the two founds.

According to a person close to the firm, all of Fund III’s position in the company has been sold. Limited partners in Fund IV, by contrast, will receive 50 percent of their holdings in cash and 50 percent in Clear Channel stock, representing approximately 8.7 million shares. According to a limited partner invested in funds advised by Hicks Muse, the cash considerations paid to Fund III and Fund IV are $463 million and $215 million, respectively.

We have long believed the public markets did not properly value Clear Channel.

John Muse and Peter Brodsky, partners, Hick Muse

Both sources noted that investors in Fund III will see a slight profit on the deal while Fund IV LPs are currently out of the money. As of September 30, 2004, Fund IV had approximately $665 million invested in the company, representing an average cost per share of $38. Clear Channel is currently trading just north of $30. At the time of the August 1999 merger between Clear Channel and AMFM, Hicks Muse’s portfolio company, the stock price was in the range of $70 per share.

The origins of the Clear Channel deal began in 1994 when Hicks Muse, through its second fund, formed Chancellor Media with approximately $70 million in equity. Through a series of transactions between 1996 and 1999 using additional equity of approximately $1.2 billion from Fund III and Fund IV, the company, renamed AMFM, acquired 465 radio stations in 105 markets.

In August 2000, AMFM and Clear Channel merged in a $23.8 billion transaction, including $16.6 billion of stock. Subsequently, Hicks Muse liquidated Fund II’s holding in the company, generating an IRR of 42 percent and 7.8 times the fund’s original investment, according to a Hicks Muse quarterly report.

In a memo sent to LPs, Hicks Muse partners John Muse and Peter Brodsky note that “we have long believed the public markets did not properly value Clear Channel”. In an effort to change that valuation, the company recently announced a strategic restructuring of its business lines, including a series of divisional spinoffs and public offerings. That announcement, however, was accompanied with declines in the core business, leading to further stock price erosion.

The partners at Hicks Muse plan to hold their remaining personal shares in the company. Nevertheless, according to the memo, due to the unknown timing of any stock price recovery, it will let its investors make any decisions on when to sell their own holdings.

At the end of last year, co-founder Tom Hicks resigned from the private equity firm he helped build into one of the world’s largest. In addition to stepping down as a board member of Clear Channel, Hicks also sold his personal holdings in the radio operator according to the limited partner source.

The firm is currently investing its fifth fund, which closed on $1.6 billion in 2002. In an earlier interview with our sister publication Private Equity International, Muse noted that Fund VI will target “either side of a billion” of new capital.