The Chinese advertising company Focus Media, which short-seller Muddy Waters claimed was overstating its assets, has received a leveraged-buyout bid from a consortium that includes its chief executive and a group of private-equity firms.
The Carlyle Group, Citic Capital Partners, CDH Investments, China Everbright, FountainVest Partners and Jason Nanchun Jiang, chairman of the board and chief executive of Focus Media, and his affiliates, have joined together to form a consortium that has proposed an offer of $27 in cash for each American depositary share (or $5.40 in cash for each ordinary share) to take the company private. This values the Shanghai-based company, which has roughly 170,000 flat-panel advertising displays in buildings in more than 90 cities in China, at $3.5 billion. If the deal goes through, it will be China’s biggest ever LBO.
The offer is 15% more than Focus’s August 10 closing price and a 30% premium to its average price during the past month. Significantly, it is also higher than the price in November, when Carson Block’s Muddy Waters started questioning Focus’s claims about the value of its assets, as well as accusing the company of overpaying for acquisitions. Focus traded at $25.50 on November 18, 2011. Muddy Waters recommended selling the stock the next day, prompting it to lose 66% by the close of trading.
According to the proposal letter, the consortium will finance the transaction with a combination of debt and equity capital. The consortium has been in discussions with Citi, Credit Suisse and DBS about financing the transaction.
Given the lack of enthusiasm in general for Chinese stocks, but specifically for those targeted by short sellers, it is clear that some people take a view that there is a valuation arbitrage that can be made on many of these companies — and that’s precisely what’s happening in this case, said a source.
“If you believe the proposition that many in the industry and on the street have for the value of this company, then it’s a good deal,” said the source. “If you take the view of Carson Block, then it’s a disaster.”
Indeed, Focus Media reported a net profit of $37.9 million for the first quarter — an 85% jump from a year earlier.
While Chinese companies have certainly been under attack from US investors during the past year, and other companies have chosen the take-private route, this deal stands out for its size and because PE firms are taking a punt, which means, of course, there needs to be an exit strategy further on down the pike.
But the immediate next step is for the board to set up an independent committee to do due diligence on the offer. They will likely take one to two months to decide whether or not to sign an agreement.
One sign that it is likely to go through is that China’s Fosun International, Focus Media’s second-largest shareholder with a 17.2% stake, said yesterday that the buyout proposal is “an attractive option” for shareholders.
Simpson Thacher & Bartlett is acting as the company’s US counsel in connection with the transaction.
Fried, Frank, Harris, Shriver & Jacobson and Sullivan & Cromwell are the international legal counsels to the sponsors; Skadden, Arps, Slate, Meagher & Flom are international legal counsel to the chairman; Zhong Lun Law Firm is the PRC legal counsel; Conyers, Dill & Pearman are the Cayman Islands legal counsel; and Ernst & Young are the accounting and tax advisers.