Focus Media Call Volume Surged Before LBO Announcement

Trading in bullish Focus Media Holding Ltd. options reached the highest level since November before the Chinese advertising company announced a leveraged buyout by private-equity firms including Carlyle Group LP.

More than 29,000 calls to buy the stock changed hands on Aug. 10, five times the four-week average and the highest since Nov. 21, according to data compiled by Bloomberg. The shares jumped 7.6 percent that day, the most since Feb. 1. Focus Media surged 8.9 percent to $25.45 in New York yesterday after the Shanghai-based company said bidders made a “non-binding” offer of $27 for each American depositary share.

Traders speculating on takeovers may use call options that convey the right to acquire shares for a given price by a certain date because they usually offer higher returns than stock. The surge follows regulatory scrutiny of a similar jump in bullish contracts before Cnooc Ltd. bid $15.1 billion for Canada’s Nexen Inc. That incident prompted the U.S. Securities and Exchange Commission to allege insider trading against people connected to the Chinese company.

“There was probably some leaking, and some people knew the news,” said Alex Wong, asset-management director at Ample Asset Management Ltd. in Hong Kong. “This is suspicious but I don’t think all the people trading the calls knew the news. There were probably some followers using the monitoring system.”

Three phone calls to Jing Lu, a spokesman for Focus Media, were unanswered. Judith Burns, a spokeswoman for the SEC, declined to comment.

Muddy Waters

The bid for Focus Media values the company, which trades on the Nasdaq Stock Market, at about $3.5 billion, according to data compiled by Bloomberg. The deal is priced higher than where Focus’s shares were in November, when short seller Carson Block’s Muddy Waters LLC began targeting the stock.

In addition to Washington-based Carlyle, the bidders for Focus Media are Chinese firms FountainVest Partners, Citic Capital Partners, CDH Investments and China Everbright Ltd. (165), the company said in the statement. Joining the group is Jason Nanchun Jiang, Focus Media’s chief executive officer.

September call options with strike prices at $22 had the biggest increase in ownership between Aug. 9 and yesterday, according to data compiled by Bloomberg. August calls with $24 and $23 strikes had the second- and third-largest increases respectively. Total open interest in Focus Media call options jumped 12 percent on Aug. 10, the data show. Ownership of puts rose 3.6 percent.

Bullish Trading

“It looks like there was bullish trading ahead of the news,” Frederic Ruffy, a senior options strategist at WhatsTrading.com, said in an Aug. 13 interview. “There were no news to explain the relative strength in the Chinese media company on Friday.”

Carolyn Lim, a spokeswoman for Singapore Exchange Ltd., which hosts American depositary receipts of Focus Media, did not immediately respond to e-mailed questions. Angelina Fernandez, a spokeswoman for the Monetary Authority of Singapore, the city-state’s regulator, also didn’t immediately respond to e-mailed questions.

The U.S. SEC obtained a second emergency court order this month to freeze assets of traders who allegedly profited from insider knowledge of Cnooc’s bid for Nexen. The SEC said the traders opened a U.S. brokerage account through Hong Kong-based CSI Capital Management Ltd. a week before the Cnooc-Nexen deal.

On July 27, the SEC announced it suspected insider trading on the deal with a court order to freeze the assets of traders who allegedly reaped more than $13 million from illegal trading. Bloomberg data showed trading in bullish Nexen contracts reached the highest level since 2008 before Cnooc announced it would buy the energy company.

Nexen’s stock rose more than 50 percent on July 23 after Beijing-based Cnooc said it would pay $15.1 billion in cash to acquire the Calgary-based company.

“Seeing movements in stock prices in the lead up to an acquisition has been going on for years and you see it many jurisdictions,” said Jonathan Foster, Singapore-based based director of Global Special Situations at Religare Capital Markets Ltd., who advises on mergers and acquisitions. “It’s not something that’s confined to Chinese companies.”

To contact the reporters on this story: Nick Gentle in Hong Kong at ngentle2@bloomberg.net; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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