Focus Media Holding looks set to become the first Chinese company to de-list from the US and re-list in the A-share market after winning the first set of approvals for a backdoor listing in Shenzhen.
If the planned reverse takeover with domestic computer manufacturer Hedy Holdings goes ahead, it will set an important precedent for other Chinese firms in the process of returning home from overseas exchanges.
According to Dealogic data, 26 US-listed Chinese firms have announced plans to de-list their shares so far this year in deals worth $31 billion. By contrast, only one such Chinese company went private last year in a deal worth $660 million.
Hedy announced that it had gained Ministry of Commerce approval in a filing to the Shenzhen Stock Exchange late on Tuesday. It said it is now waiting for approval from the China Securities Regulatory Commission, which may come quickly.
“The CSRC will conduct the hearing next week," one source with direct knowledge of the deal told FinanceAsia. "No one can be 100% sure the regulator will approve it but it’s quite likely and Focus Media would then re-list before the end of the year."
Focus Media de-listed from the Nasdaq in 2013 after it was subject to attacks by short seller Muddy Waters. The source said the company initially considered other options including listing in Hong Kong.
"The A-share market wasn't performing very well then," he explained.
The group de-listed from the Nasdaq through a $3.7 billion leveraged buy-out led by chairman and founder Jason Nanchun Jiang, plus the Carlyle Group, CITIC Capital Partners, China Everbright, FountainVest Partners and CDH Investments.
The deal still ranks as the biggest take-private deal of a US-listed Chinese firm. Recent filings by Hedy show that the valuation has since almost doubled.
Earlier this August, Hedy said it was valuing Focus Media at Rmb45.7 billion ($7.18 billion). It plans to acquire the company through a mixture of cash, new shares and an asset swap.
It simultaneously announced an Rmb5 billion placement to finance the acquisition.
Upon completion of the transaction, Jiang would become the controlling shareholder of the listed unit.
“Focus Media doesn’t have many re-listing options,” one Beijing-based M&A lawyer told FinanceAsia. “Going public via a shell is a much faster and easier process than applying for an IPO again.”
“So many firms are waiting in the IPO pipeline." he added. "It would take ages for the company’s turn to come."
In a reverse merger, also known as a backdoor listing, a company goes public by being purchased by an already listed company. Such reverse takeovers typically draw less regulatory scrutiny than IPOs but still require approvals from the CSRC and other regulators.
The announcement comes at a time when China’s securities watchdog has lifted a four-month freeze on A-share IPOs, with the mainland stock market rebounding strongly after a tortuous summer. Beijing says 28 companies out of a 600-long queue will float before the end of the year.
Going private, coming home
The preceding A-share rally, which began late last year, set in train a wave of privatizations by US-listed Chinese companies seeking to return home in the hope of achieving higher valuations, higher trading volumes and a less demanding regulatory environment.
In mid-June, days before the Chinese stock market started to plunge, Chinese internet company Qihoo 360 Technology said it had received a $9.1 billion buyout offer from a number of interested parties. The group includes its chairman and CEO Zhou Hongyi, plus China Renaissance Holding, Citic Securities, Golden Brick Capital Private Equity and Sequoia Capital China.
Other deals include a $3.3 billion offer to take private WuXi PharmaTech, a major R&D and technology platform company and a $2.65 billion offer for Momo, a popular dating app known as China’s Tinder.
Focus Media had initially sought a backdoor listing via Shenzhen-listed rubber producer Hongda New Material but scrapped it in August after Hongda’s chairman Zhu Dehong was investigated for suspected violations of securities law.
The group listed on the Nasdaq in 2005 but in 2011 short seller Muddy Waters accused Focus Media of exaggerating the size of its advertising network and overpaying for acquisitions. Its shares plunged by as much as 40% at their lowest point, notwithstanding Focus Media’s denial of the allegations.
Founded in 2003, Focus Media operates a network of LCD advertising screens in public venues such as offices, shops, lifts and residential buildings across China. Its net profit reached Rmb2.4 billion in 2014, up from Rmb2.1 billion in 2013 and Rmb1.3 billion in 2012.