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Focus Media plans to go private

by Chris Nolter | Published August 14, 2012 at 8:26 AM

The roughly $3.5 billion takeout offer for Chinese digital advertising outfit Focus Media Holding Ltd. would represent a landmark investment in a company that has seen its valuation squeezed since the appearance last fall of a research report critical of its accounting and other practices.

The buyout group includes chairman and CEO Jason Nanchun Jiang and FountainVest Partners, Carlyle Group, Citic Capital Partners, CDH Investments and China Everbright Ltd.

It would be the largest private equity deal in China, according to statistics compiled by Dealogic (Holdings) plc. The group would pay $27 in cash per American Depositary Share. The Shanghai company's ADRs rose $2.23, or about 9.5%, to $25.61 on Monday afternoon.

The company sells advertisements on flat panel displays in elevators, in movie theaters before films and in other locations. Revenue increased 35% in the first quarter. However, the company has been dogged by accusations leveled by Muddy Waters LLC last fall about its accounting practices.

"It's a better valuation than U.S. investors have given to the company," said analyst Tian Hou of T.H. Capital Research, a firm in Beijing and New York. Nonetheless, Hou said she doesn't believe the valuation is fair. "I think it's undervalued."

Hou noted that the stock traded in the $30-range last year. The stock was in the upper $20s just before the November 2011 Muddy Waters report, which challenged Focus Media's reported number of advertising screens and its treatment of acquisitions, among other matters.

James Lee of Credit Agricole Securities (USA) Inc. has a $38 target on the stock. "FMCN has been hit harder than other Chinese media stocks after Muddy Waters' accusations of fraudulent activity," he wrote in a Monday report, suggesting that the offer would provide a floor for the stock. "We continue to believe the short story is diminishing," he added.

Muddy Waters head of research Carson Block said in a Monday statement, "The markets are far better off if a few deep-pocketed investors own this company instead of mutual funds and other public shareholders."

Hou said there were 13 successful privatizations of Chinese companies that traded in the U.S. last year. This year she noted that 19 have been announced. "If the negative sentiment against Chinese stocks in the U.S. markets doesn't change, we are going to see the trend continue," Hou said.

The number of PE-sponsored deals in China peaked at 110 in 2007, according to Dealogic. There were 65 deals totalling $5.1 billion in 2011. Focus Media would be the largest deal, according to Dealogic, topping Goldman, Sachs & Co.'s nearly $2.6 billion purchase of a stake in Industrial & Commercial Bank of China.

It would also exceed the value of the $2 billion purchase of a majority stake in Honiton Energy Holdings Ltd. by Tanti Group of Cos. and Arcapita Bank BSCC, and the $1.6 billion purchase of a minority stake in Alibaba Group Holding Ltd. by Silver Lake Partners LP, Temasek Holdings (Pte) Ltd., Yunfeng Capital and Digital Sky Technologies.

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Focus Media plans to go private

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