Clear Channel up 6.5% on week but a lawsuit looms; 3Com down 5.25% as shareholder vote delayed again

By Paul A. Harris

St. Louis, March 6 - Shares of Clear Channel Communications Inc. (NYSE: CCU) continued to trade higher on Thursday, gaining 1.19%, or $0.40, to close at $34.08, up 6.5% from last Friday's close.

However a special situations equities analyst told Prospect News that even though the $19.5 billion, $39.20 per share, LBO of the company by Bain Capital and Thomas H. Lee Partners has provisionally cleared its regulatory hurdles, and the company has announced it expects to close by March 31, a pending lawsuit could forestall the closing of the deal.

The lawsuit involves Providence Equity Partners' acquisition of 56 television stations from Clear Channel for $1.1 billion. That price was decreased from $1.2 billion in a revision to which the two parties, Clear Channel and Providence Equity, agreed subsequent to the original deal having been struck.

On Feb. 22 Wachovia Corp., Providence Equity's lender, filed a suit in North Carolina seeking to abandon its $500 million commitment to help finance the acquisition. Wachovia asserts that the change could indicate that there has been a material adverse effect on the business.

Soon after, Providence Equity sued Wachovia in the Delaware Chancery Court, seeking to force the bank to finance the revised purchase price.

That suit goes to trial on April 7.

The special situations analyst questions whether Bain will close the LBO of Clear Channel with financing for the sale of the 56 stations hung up in court.

Wachovia may ultimately be using the revision of the deal between Providence Equity and Clear Channel as an excuse to abandon a risky financing, the analyst said.

However the revised deal is not the deal Wachovia signed off on, the source added.

3Com a political football

Bain Capital is also the sponsor of the pending merger of 3Com Corp., a deal that market sources continue to characterize as "a political football."

News, in the form of a press release, surfaced on the deal Thursday.

3Com announced delaying the meeting at which shareholders' will vote on the sale. The meeting, which was scheduled for Friday will be delayed for two weeks until Friday, March 21.

"Adjourning the meeting for an additional 14 days enables 3Com to continue working with Bain Capital Partners to construct alternatives that would address concerns raised by the Committee on Foreign Investment in the United States (Cfius) regarding the pending merger transaction between the parties," the company stated in Thursday's press release.

The Cfius concerns revolve around Chinese telecom Huawei acquiring a 16½% stake in 3Com which provides the U.S. military with sensitive technology services and equipment.

An analyst who covers the sector told Prospect News on Thursday that contention centers on 3Com subsidiary H3C, a provider of military support technology.

H3C, the analyst recounted, had been a joint venture between 3Com and Huawei.

"It's based in China. All the R&D is done in China. And most of the employees are in China," the analyst said.

Last summer, the analyst continued, 3Com ended up owning 100% of the former joint venture.

"My question is, What technology has H3C developed in the intervening months that is so sensitive?" the source said.

Either U.S. intelligence agencies have information that raises concerns about Huawei, because of Huawei's connection with the Chinese military, or Cfius is looking at the deal from a political perspective, the analyst added.

Regardless, the source continued, Huawei won't have operational control of H3C as a result of the merger.

The analyst would not rule out the possibility that Bain's $5.30 per share cash offer could change.

"Whatever happens," the analyst said, "if Huawei isn't part of the deal, the deal won't get done."

Shares of 3Com (Nasdaq: COMS) dropped by 5.25% on Thursday, down $0.17 to close at $3.07.

Positive sign for Energy East

Shares of Energy East Corp. (NYSE: EAS) ended the Wednesday session unchanged at $26.65, as the proposed $28.50 per share acquisition of the company by Spanish utility Iberdrola SA continues to be the subject of hearings by the New York Public Service Commission.

One issue that has dogged the deal is the possibility that Iberdrola itself may be the subject of a hostile takeover bid from a larger European utility.

On that front there was news Thursday according to a special situations equities analyst, as Spanish prime ministerial candidate Mariano Rajoy Brey, the leader of the conservative Popular Party, told Madrid daily newspaper El Pais that he is opposed to an Electricite de France bid for Iberdrola.

An analyst in the electric utilities sector told Prospect News on Thursday that the Energy East-Iberdrola deal should get done.

"We never thought that it would have a problem with regulators," the source said.

"The question was, could the energy company and regulators arrive at an accommodation?

"Was Iberdrola willing to give up enough to satisfy the regulators, or were the regulators going to demand more than Iberdrola was willing to give?

"Right now, the fact that they have been engaged in settlement discussions for two weeks is a very positive sign that things are moving forward."

Iberdrola's shares advanced 1.71%, or €0.17, to close at €10.11.

CIT drops 22%

The major U.S. and European stock indexes all posted losses of greater than 1% on Thursday.

In the United States, the Nasdaq composite gave up 2.3% to close the session at 2,220.50, down 52.31.

The S&P 500 fell by 2.2%, down 29.36 to close at 1,304.34.

The Dow Jones Industrial Average dropped by 1.75%, or 214.60 points, to close at 12,040.39.

One equities analyst who covers financials told Prospect News shortly after the session's close that the story of the day in that sector was CIT Group Inc., shares of which fell 22.1% on news that an analyst from Keefe, Bruyette & Woods is maintaining that CIT might have to take a massive charge to its student loan portfolio.

The company's shares (NYSE: CIT) lost $4.50 on the day to close at $15.86.

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