Focus Media, which operates the largest out-of-home flat panel display advertising network in China, has sold $295.3 million worth of additional American Depositary Shares, which allowed existing shareholders to cash in part of their gains at the same time as the company raised funds to pay for recent acquisitions.
The offer, which was jointly arranged by Credit Suisse and Goldman Sachs, met with strong demand from investors who were keen to tap into the growth potential of a company which has seen its share price more than double since listing on Nasdaq in the middle of last year.
The share sale also sparked a renewed buying frenzy of the stock, which rallied a combined 23.2% on Friday and Monday to a new record close of $54.34. Analysts say the company is well placed to benefit from China's rise to the fourth largest advertising market in the world, given that out-of-home LCD screens are seen to be the rising star of the sector.
Focus Media sold 6.79 million ADS at $43.50 each, equivalent to a discount of 1.36% to Thursday's closing price of $44.10. The price values the company at 37.8 times its estimated 2006 earnings.
The tight margin was possible as the order book was said to have attracted about 100 investors and been about four times covered. US investors accounted for 85% of the demand, Asia 10% and Europe 5%, which is also how the deal was allocated, observers said.
The offer includes a greenshoe of 627,560 ADS, that could lift total proceeds to $322.6 million. Each ADS is equal to 10 shares.
The company will get only 22% of the gross proceeds, or about $62.5 million, as 5.3 million of the ADS were backed by secondary shares sold by the majority shareholder. The new shares account for about 3.81% of the enlarged issued share capital. The greenshoe consists of secondary shares only.
In an SEC filing the company said it expected $40 million of the proceeds to go towards payments of acquisitions already made, while the remainder may be used for future strategic acquisitions, the expansion of its advertising network and for general corporate purposes.
Earlier this month, Focus Media said it will buy 100% of its largest mainland rival, Target Media, for $325 million, of which $94 million will be paid in cash and the rest in the form of new Focus Media shares. The merger will create a powerhouse within audiovisual media advertising with over 60,000 flat panel displays in more than 30,000 commercial locations spread over 75 cities in China, and should result in "additional shareholder value through cost structure improvements and access to new growth opportunities," the company said at the time of the acquisition.
Aside from this high-profile deal, Focus Media has also been aggressively buying up other companies since its July listing, which has added to its top line growth. According to the share sale prospectus, the company projects its total revenues for the three months ending December 2005 will be in a range of $22-23 million, virtually double the $11.8 million it reported for the same period 2004.
Net income is expected to be in a range of $8.7 to $9.1 million, compared with a loss of $1.3 million in the September-December period 2004.
An analyst at PiperJaffray said in a recent report that Focus Media and the newly acquired Target Media should both be able to grow revenues at a 40% rate in 2006, while maintaining operating margins at 35%.