The market is taking the inquiry in stride.
Focus Media is being acquired by a group including its chairman and CEO Jason Nanchun Jiang, an Asian arm of Carlyle Group, FountainVest China Growth Capital Fund LP and various affiliates for $27.50 per share based on the Focus Media American Depositary Shares. Jiang holds 35.5% of Focus Media, which provides digital media displays for advertising with an emphasis on the Chinese consumer.
Focus Media shares trade for about $25.80 at a spread of $1.70, or 6.6%, to their value in the buyout. If the deal closes at the end of May, that represents an annualized return of 19%.
The 13E filing for the management buyout states that Focus Media has been under a nonpublic investigation by the SEC since March 2012. The agency is looking at potential problems related to the company's financial statements but the SEC indicates that the investigation should not be construed as an indication that any violation has occurred. Focus Media has since been cooperating with the investigation, which covers a broad range of the operations of Focus Media including a management buyout of a 38% interest in a company subsidiary in 2010 and a wide stretch of accounting issues.
Some of the issues mentioned in the SEC query have been raised by analysts and challenged by Focus Media over the past year.
The background section of the transaction history shows that buyout firms began looking at Focus Media around the time of the SEC inquiry and backed off for several months. The parties to the current deal were informed by Focus Media and its counsel about the investigation process from September through when the deal was executed in December.
The buyout includes a debt commitment from Bank of America NA, China Development Bank Corp., China Minsheng Banking Corp., Citigroup Global Markets Asia Ltd., Credit Suisse AG, Deutsche Bank AG and affiliates.
Risk arbitrageurs did back off from the transaction in November when one potential equity investor was reported to walk from the opportunity. In recent years, some Chinese companies listed in the U.S. have fallen under scrutiny by the SEC regarding the accuracy of financial filings.
The Focus Media inquiry is not new and the buyers have been fully aware of the process. The development of the buyout seems to have been prolonged, in part, because of the inquiry, so the chance that it will pose a problem for the merger is somewhat mitigated. But the deal spread has some risk priced in, so arbs are not entirely comfortable with the matter.
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