China Mass Media completes scaled-down IPO

The CCTV advertising agent raises $49 million from its US IPO, but its share price drops 14.7% in the first two days as investors remain sceptical towards newcomers.
China Mass Media International Advertising (CMM) was able to price its US initial public offering before the opening of trading on Monday, becoming the second Chinese company to complete a US listing in less than a week. The company raised $49 million after fixing the price at the bottom of a revised range.

However, the listing did come at a price, as the company was forced to trim the initial IPO size by almost 35% (based on the bottom of the offering range) to attract enough buyers. And while the share price held up reasonably well on the first day of trading on Monday when it fell 4.4% in a generally weak market, the stock took a proper tumble Tuesday, losing 10.8% to $5.80.

CMMÆs struggle is yet more proof of how challenging the primary markets are at the moment and of the investor reluctance to commit money to newcomers. Numerous deals have been pulled in the past few months and many more have been delayed. Last week saw only one new listing in the US markets, and according to Dealogic, the number of global public offerings in July was the smallest for that month in five years with 47 IPOs raising $5.6 billion. This compares with 190 issues raising $31.7 billion in July 2007.

In this kind of environment, issuers can be happy to get a deal done at all. And given the drastic adjustment to CMMÆs offering at the end of last week, executing the deal and becoming a listed company appears to have been the companyÆs key priority û as opposed to raising a certain amount of money.

The Beijing-based advertising agent, which was brought to market by Merrill Lynch, had been due to close and price its IPO after the close of trading last Thursday, but instead issued a new prospectus on Friday informing potential investors that it had increased its ratio of American Depositary Shares (ADS) to ordinary shares from 15 to 30. It also lifted the absolute price range slightly, resulting in a significantly smaller deal in dollar terms. And to have time to build a book according to those new parameters, the trading debut was moved from Friday to Monday.

Under the revised terms, CMM offered 7.21 million ADS, representing approximately 216 million ordinary shares or just below 30% of the company. The price range was $6.80 to $7.80 per ADS. The final price was fixed at $6.80, resulting in a total deal size of $49 million, or up to $56.4 million if the 15% greenshoe is exercised.

This is significantly less than the $75 million to $103.9 million that the company had planned to raise, according to the initial filing. The original deal comprised 14.42 million ADS, representing 216 million ordinary shares, which were offered at a price between $5.20 and $7.20 per ADS.

At the final IPO price, CMM is valued at about 5.6 times its 2008 earnings, which puts it at a significant discount to SinoMedia Holdings, another China-based advertiser that listed in Hong Kong at the beginning of July. The two companies are similar in that they both sell advertising space on CCTV, China's state owned television network, but while SinoMedia focuses on the niche English channel, CMM is selling slots for the two most popular channels on the network.

At the time CMM was priced, SinoMedia was trading at a 2008 price-to-earnings ratio of 10.3 times. It came to market at a slightly higher valuation, but the share price has fallen 7.9% since the July 8 debut. Among the Chinese advertising companies listed in the US, Focus Media, which provides screen-based advertising at public spaces such as office buildings, was trading at 17.5 times.

CMM comes to market only days after another Chinese company, China Distance Education Holdings (CDEL), completed a US IPO of $61.25 million. It too was forced to revise down its initial price range by 22% and then priced at the very bottom of the new range at $7. After falling 12% in the first two days of trading last week, the stock has rebounded slightly, and yesterday the provider of online education and test preparation courses closed at $6.45 û 7.9% below the IPO price. CDELÆs offering was arranged by Citi and Merrill Lynch.

Some observers say the fact that two Chinese companies have been able to complete a US listing within a few days of one another in an environment where even the domestic companies are struggling to raise fresh capital is no bad feat though. And it does show that the market is still open, although investors appear to need wider and wider discounts to the sector peers to be convinced to participate. But as proven by both CDEL and CMM û even with a big discount it can be a struggle to get these deals out the door.

On the other hand, the investors who do come into a deal in this type of market are usually the kind that have done extensive due diligence and intends to hold on to the stock at least for the medium term, which should be positive for the issuer.

However, there are also plenty of companies that will not sell shares at levels they consider too cheap and as a result have put their IPOs on hold while waiting for sentiment to become a bit more positive. Among those are Chinese solar power play GCL Silicon, which started investor education for an IPO of up to $862.5 million on July 21, but decided last week to hold off on launching a formal roadshow for now. Credit Suisse and Morgan Stanley are the bookrunners for that offering.

Not everyone is deterred though, as shown by the fact that the pipeline of share offerings continues to grow. Last Friday, Nasdaq-listed VisionChina Media, which is another Chinese advertising company, filed for a combined follow-on and shareholder sell-down of 8 million ADS, with sources saying the deal could launch as early as Friday this week. Based on yesterdayÆs closing price of $19.60, the deal could raise about $150 million.

The bulk of the deal, or 7 million ADS, is being sold by existing shareholders who will try to cash in on the 145% gain in VisionChinaÆs share price since it listed in December last year. The stock has bucked the downward trend in the broader market for most of this year and closed at a record high of $25.04 last week before the transaction was announced.

The company operates a digital TV network that is installed mainly on buses, which broadcasts real-time content provided by joint ventures that it has with local TV stations. VisionChina sells advertising time during the breaks between these programmes as well as soft advertising time embedding in the programmes. Credit Suisse, Morgan Stanley and Merrill Lynch will arrange the offering.

¬ Haymarket Media Limited. All rights reserved.
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