Jitters over Focus Media fading

The risk arbitrage market is getting more comfortable with the $3.8 billion buyout of China's digital advertiser Focus Media Holding Ltd. by management and a consortium of private equity partners.

The spread for the buyout has recovered in recent weeks from about $2.30 to roughly $1.30, or 5.1%. Arbs have had concerns regarding disclosure in January filings for the transaction that the Securities and Exchange Commission had been engaged in an informal inquiry regarding the company's financial filings and transactions since March 2012.

The agency is looking at a laundry list of potential problems related to the company's financial statements, asset sales and public offerings without indications that violations of securities laws have occurred. Since January, Focus Media has updated its 13E filing for the buyout twice without revision to the disclosure regarding the SEC inquiry, which has boosted confidence in the deal getting done.

Focus Media is being taken private by its chairman and CEO Jason Nanchun Jiang with backing from Carlyle Group and FountainVest China Growth Capital Fund LP for $27.50 per share based on the Focus Media American Depositary Shares, less a 5 cent fee for terminating the ADS and $5.50 per share for the common stock. Jiang and other insiders rolling equity account for 36% of Focus Media.

Carlyle had previously indicated that it was aware of the SEC investigation during due diligence and comfortable with the matter. The firm declined to comment for this column.

Financing of a $1.07 billion debt facility is expected to close this week in a further indication that the deal continues to move toward a close.

A vote has not been set as the proxy has not cleared the SEC, but given that the third version of the 13E was filed March 8 it is reasonable to expect a shareholder vote could come by late April or early May.

Focus Media announces fourth-quarter and full-year results March 25 and will hold a conference call. An arb said earnings are expected to be good for the last quarter.

If the deal closes at the end of May, the current spread represents an annualized return of 26%.

The parties to the transaction continue to expect a deal close in the second quarter.