Kings of capitalism

Who really wears the crown now the pain is starting to tell, asks Nicholas Lockley.

We have of course always known it, but contrary to public perception, the real kings of capitalism were never the mega buyout firms that ramped up prices on the back of cheap credit in the scramble for quality assets. Without the banks they are nothing.

And the banks were hardly masters of their own destiny either, caught as they were in a fee-induced frenzy. They couldn’t stop dancing till the music stopped.

Now the band has abandoned the stage and the lawyers are looking like the real beneficiaries as the buyout to take private Clear Channel, a US media group, has become mired in the courts. Buyout firms Thomas H Lee Partners and Bain Capital are suing their own banks on the $26 billion (€16.5 billion) deal in an effort to force them to provide funding for the deal.

The private equity firms have filed lawsuits against Citigroup, Morgan Stanley, Credit Suisse, RBS, Wachovia and Deutsche Bank in New York and Texan courts; Clear Channel has joined the sponsors as a plaintiff in the Texas suit. The sponsors argue they should receive damages substantially exceeding the deal’s $26 billion price if funding is not provided as agreed. The Texas complaint has already led to a temporary restraining order from a judge that effectively demands the banks fund the deal.

The banks maintain that they have been and continue to be prepared to honour their obligations as outlined in the commitment letter. “We believe the suits are without merit and will contest them vigourously,” the syndicate said.

And expensively, they might as well have added. But even after the lawyers’ fees, it still seems to make more sense to the banks to walk away than to watch the debt on another big buyout trade down to distress. It matters not a jot that Bain Capital paid $398m in fees for the past three years to the six investment banks involved in the deal while Thomas H. Lee Partners paid $195m for the same period, according to investment banking research provider Dealogic. No love is lost.

The best outcome will surely be a swift compromise that sees a deal go ahead on revised terms. But whether Joseph Jamail Jr, a billionaire himself and known as the “king of torts”, will settle for that, is uncertain. Jamail is acting for Clear Channel. He is 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. Texaco had to seek bankruptcy protection. Kings of capitalism? Look no further than the lawyers.