Focus Media Gets Offer in Biggest China Leveraged Buyout

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Focus Media Gets Offer From Investors in Biggest China LBO
“Focus Media is very dominant in the public-display advertising space in China and has geographically diversified itself throughout China’s big cities,” said Timothy Ghriskey, chief investment officer of Solaris Group LLC, a New York-based firm that sold its stake in the company during the second quarter of 2011. Photographer: Nelson Ching/Bloomberg

Focus Media Holding Ltd., a Chinese advertising company targeted by short-seller Carson Block, received a bid from private-equity firms including Carlyle Group LP in what would be the country’s largest leveraged buyout.

The bidders made a “non-binding” offer of $27 for each American depositary share, the Shanghai-based company said yesterday in a statement. The offer is 15 percent more than Focus’s Aug. 10 closing price and above the level when Block’s Muddy Waters LLC began targeting it in November.

Some Chinese companies that were the subjects of research by short sellers rose in U.S. trading yesterday after the bidders, who include Citic Capital Partners and Focus Media Chief Executive Officer Jason Nanchun Jiang, made the proposal that values the company at $3.5 billion. A successful deal would see the advertising group join Chinese companies such as Fushi Copperweld Inc. and Winner Medical Group Inc. in backing moves to go private after short sellers raised accounting and corporate governance concerns.

The offer “is another example of how Chinese are taking more and more of their companies private,” Sachin Shah, a Jersey City, New Jersey-based special-situations and merger-arbitrage strategist at Tullett Prebon Plc, said by phone. “The U.S. market isn’t properly valuing them and doesn’t know if the offer price is right, allowing the management of the companies to possibly win in getting the assets at lower valuations.”

Options Surge

Focus Media’s American depositary shares climbed 8.9 percent to $25.45 yesterday after jumping 7.6 percent on Aug. 10. The company has about 129.3 million ADRs outstanding.

Focus Media’s bullish options trading jumped to the highest level since November on Aug. 10. More than 29,000 calls to buy the stock changed hands, five times the four-week average, compared with 7,635 for puts to sell.

Fosun International Ltd., which owns a 17.2 percent stake in Focus Media, said the offer is an “attractive option.” Fosun hasn’t made a commitment on the deal and will monitor the situation, it said in an e-mailed statement.

Fosun, an investment company listed in Hong Kong, is the second-biggest shareholder in Focus Media behind Jiang, according to data compiled by Bloomberg.

“The current offer price represents a reasonable premium,” Jin Yoon, an analyst at Nomura Holdings Inc., wrote in a report. “Despite Focus Media’s wide coverage in top-tier cities and scalable business model, market concerns regarding corporate governance will continue to weigh.”

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Focus Media traded at $25.50 on Nov. 18. 2011, before Muddy Waters recommended betting against the stock. The stock plunged as much as 66 percent the next trading day after Block’s firm issued a strong sell recommendation.

Muddy Waters in February issued a fifth report that said Focus Media overstated its ad network. Short sales involve borrowing a security such as a stock or bond, then selling it in anticipation of a price decline.

Universal Travel Group, whose financial statements and business model were questioned by Glaucus Research Group last year, climbed 47 percent to $1 yesterday, advancing 85 percent in three trading days. Duoyuan Global Water Inc., rated a “strong sell” by Muddy Waters when it initiated coverage in April last year, rallied 11 percent to 30 cents.

Since last year, companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations as Block helped fuel scrutiny with reports on corporations including Rino International Corp. and Sino-Forest Corp.

‘A Bargain’

In Hong Kong, stocks that fell after research reports by short sellers include Evergrande Real Estate Group Ltd., Winsway Coking Coal Holdings Ltd. and China Yurun Food Group Ltd.

Winner Medical last month backed a merger pact with a company owned by its chairman. In June, Fushi agreed to be bought by a group including CEO Li Fu and Abax Global Capital.

In addition to Citic Capital and Washington-based Carlyle, the bidders for Focus Media include FountainVest Partners, CDH Investments and China Everbright Ltd., the company said in the statement.

“Focus Media is very dominant in the public-display advertising space in China and has geographically diversified itself throughout China’s big cities,” said Timothy Ghriskey, chief investment officer of Solaris Group LLC, a New York-based firm that sold its stake in the company a year ago. “The PE firms are seeing a bargain here.”

Raising Yuan

Private-equity investors including Carlyle and TPG Capital are turning to China and its growing middle class as the volume of deals shrinks in Europe and the U.S. Focus Media runs an out-of-home advertising network in China, using audiovisual displays placed in cities and large venues.

Private-equity investments by Chinese firms rose to $7.8 billion last year, exceeding for the first time the $7.4 billion poured in by U.S. and other foreign funds, as China steps up efforts to develop home-grown investors, according to the Asian Venture Capital Journal, which tracks the industry.

As a result, some U.S. firms are raising yuan, the Chinese currency. Carlyle, the world’s second-largest private-equity firm, raised a 3.2 billion-yuan ($503 million) fund in July last year.

Yuan private-equity funds have raised $41 billion in the past two years, more than double the U.S. dollar amount in China, according to the data from the venture-capital journal. At the same time, foreign-currency funds focusing on China slumped to $10.2 billion last year from $39.2 billion in 2007, according to an April report by consulting firm Bain & Co.

“The company’s board of directors has formed a committee of independent directors to consider the proposed transaction,” Focus Media said in the statement.

The investor group plans to use a combination of debt and equity to finance the purchase. The bidders have provided a letter from Citigroup Inc., Credit Suisse AG and DBS Bank Ltd. stating the banks are “highly confident” of their ability to fully underwrite the debt financing of the deal, the company said in the statement.

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