Carlyle-Focus Media Buyout Doubted as Puts Jump: China Overnight

Options traders are losing confidence that private-equity firms from Carlyle Group LP to FountainVest Partners will complete the $3.5 billion acquisition of Shanghai-based Focus Media Holding Ltd.

Puts with an exercise price 10 percent below Focus Media shares cost 1.62 times more than calls betting on a 10 percent increase on Sept. 7, three-month data compiled by Bloomberg show. The gauge known as skew rose to an all-time high of 1.85 on Aug. 30. Shares traded at $24.29 on Sept. 7, or 11 percent below the $27 offer received on Aug. 12, while the Bloomberg China-US Equity Index completed its first gain in four weeks.

Focus Media, targeted by short seller Carson Block’s Muddy Waters LLC as recently as February, said on Aug. 13 it received a bid from a group including Chief Executive Officer Jason Nanchun Jiang, Washington-based Carlyle and Hong Kong-based FountainVest that would mark the country’s largest leveraged buyout. Options trading shows investors have “real concerns” that the deal may collapse as Muddy Waters says the firm manipulates its accounting, Timber Hill LLC said.

“This name has had a cloud over it for some time,” Steve Sosnick, an equity risk manager at Timber Hill, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc., said by e-mail on Sept. 6. “There is a significant amount of opacity.”

Non-Binding Offer

Focus Media’s shares have climbed 3.9 percent since Aug. 10, the last trading day before it announced receiving a non-binding offer from a group of companies that also include CITIC Capital Partners, CDH Investments and China Everbright Ltd. There can be no assurance that any definitive offer will be finalized from the group or that any agreement will be executed, Focus said in its Aug. 13 statement.

A phone call to the press office of Focus Media went unanswered on Sept. 7. Spokesman Jing Lu didn’t respond to an e-mail seeking comment.

Put options of the target company in a takeover offer tend to be more expensive than calls because investors demand for protection in case the deal falls apart while the upside gain is capped by the offering prices, according to Ralph Edwards, director of derivatives strategy at Investment Technology Group in New York. There’s no “extraordinary dynamics at work” in Focus Media’s options, Edwards said in an e-mail reply.

The 11 percent difference between the offering price for Focus Media and its Sept. 7 close compares with the average 20 percent premium of four pending cash buyout deals targeting U.S.-listed Chinese companies tracked by Bloomberg.

Exit From U.S.

A growing number of overseas listed Chinese companies are seeking to withdraw from the U.S. market as their valuation shrinks after Block and other short sellers alleged financial irregularities at companies including Sino-Forest Corp. and China MediaExpress Holdings Inc.

Since 2011, 33 Chinese companies have announced buyout and privatization deals, and 15 completed the transaction, according to Roth Capital. Three deals were terminated, including CNinsure Inc., a Chinese insurance company. CNinsure’s shares have dropped 43 percent since September 2011 when a group of investors including TPG Asia V MU Inc. withdrew a non-binding bid four months after offering the privatization proposal.

“This discount on Focus is all about investor distaste for U.S.-listed Chinese names,” David Riedel, president of Riedel Research Group Inc., said in a phone interview. “It’s a big deal, it involves a lot of money, and it may languish and fall apart or take so long to close that it’s not worth tying up your money for a year or more.”

Weekly Gain

The Bloomberg China-US Index of the biggest Chinese stocks traded in New York gained 1 percent to 88.84 last week, its first five-day advance in a month.

Yanzhou Coal Mining Co., China’s fourth-largest producer, rallied 7.8 percent on Sept. 7 as Youku Tudou Inc. climbed 6.6 percent, the most since the two operators of video-sharing websites merged on Aug. 24. New Oriental Education & Technology Group Inc. jumped after Morgan Stanley said the shares will rise.

Focus Media, which sells ads on screens and posters in office buildings and theaters, plunged as much as 66 percent on Nov. 21 after Block’s firm said it exaggerated its ad network and may have overpaid for takeovers to mask losses.

Focus Media has said market surveys conducted by Ipsos SA, a Paris-based polling company, and its unit Synovate in more than 100 cities showed that the number of LCD screens and poster frames reported by the Chinese company was more than 99 percent accurate.

Block declined to comment for the story in an e-mailed statement. Carlyle doesn’t comment on “market speculation,” spokesman Christopher Ullman said in an e-mailed reply.

Price Drop

The offering price equals 10 times its estimated 12-month earnings, compared with an average ratio of 14 among the 55 biggest Chinese companies listed in the U.S., according to data compiled by Bloomberg. The company had $650 million in cash and equivalents at the end of the second quarter and had a gross profit margin of 64 percent.

The offer is too low for shareholders who may vote down the deal, causing share prices to drop in the “short term,” according to Qiu Lin, an analyst at GuoSen Securities in Hong Kong, who recommends buying the shares.

“It is not easy for this plan to go through,” Lin wrote in an e-mail. “There is chance that Focus Media either stops the privatization or raise the offering price.”

Fosun International Ltd., which owns a 17.2 percent stake in Focus Media and is the largest shareholder, said in a statement on Aug. 14 that the offer is an “attractive option,” while it hasn’t made a commitment on the deal.

Short sales involve borrowing a security such as a stock or bond, then selling it in anticipation of a price decline. Short interest for Focus Media has declined to 1.2 percent of shares outstanding, from 11.2 percent on Nov. 22, according to data compiled by Markit, a London-based research firm.


Implied volatility on three-month 10 percent put options has increased to 47.4 percent from 33.3 percent on Aug. 13, while 10 percent calls rose to 29.2 percent from 24.7 percent, according to data compiled by Bloomberg. The put-to-call ratio of open interests rose to 0.97 as of Sept. 5, the highest since June.

“I’m not sure this deal is actually going to happen,” Timothy Ghriskey, chief investment officer at New York-based Solaris Group, who sold his holdings of Focus Media in August 2011, said in a phone interview. “We like the Focus Media story if it wasn’t for the overhang of accounting question on Chinese stocks generally.”

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