Focus Media Holding Ltd. fell the most in four months on concern a U.S. Securities and Exchange Commission investigation into potential securities law violations will endanger China’s biggest leveraged buyout.
Focus, a Shanghai-based advertising company, dropped 3.1 percent to $24.99 in New York, the steepest one-day slump since Sept. 24. The company, which earlier sank as much as 8 percent, said in a Jan. 18 regulatory filing that the SEC is probing the purchase and resale of companies including Allyes Online Media Holding Ltd.
Focus agreed Dec. 19 to be bought for $3.7 billion by a consortium of investors led by Carlyle Group LP. The ad company, which short-seller Muddy Waters LLC said in 2011 overstated its network, joins Chinese companies seeking to withdraw from U.S. exchanges after corporate governance concerns cut valuations. Focus is a “long-standing fraud” and the Carlyle-led group will see a “significant loss” on the buyout, according to a report posted on Muddy Waters’ website today.
“Any time you say SEC and probe it’s certainly bad for the company’s share price, especially if part of that sentence also includes U.S.-listed China,” David Riedel, president of Riedel Research Group Inc., said by phone in New York. “But the real deciding factor is whether the privatization is going to go through.”
The consortium is “comfortable” moving ahead with the transaction, Randall Whitestone, a Carlyle spokesman based in New York, said by e-mail today before Muddy Waters’ report was posted. “We are aware of this inquiry, have analyzed its potential impact,” he said.
Focus’s media manager Jing Lu didn’t immediately return a phone call made outside of business hours in Shanghai, and didn’t respond to an e-mail. An e-mail sent to Chief Executive Officer Jason Nanchun Jiang was also not immediately answered.
In an indemnification agreement included in the Jan. 18 filing, Focus says Jiang’s parties agree to indemnify and hold harmless units of Carlyle, FountainVest Partners and Citic Capital Partners -- other members of the consortium -- “from and against any losses” up to $140 million in connection with current and future regulatory proceedings against Focus.
In today’s report, Muddy Waters reiterated its claim that Focus Media “engaged in at least 21 acquisitions and disposals in order to produce fraudulent financials.” While the note did not directly mention Allyes, the research firm has written about the acquisition in the past, saying Focus overpaid “for a company that Focus bought in part from Focus insiders” in a November 2011 report initiating coverage of the company with a strong sell rating.
The SEC first informed Focus that it was initiating a non-public investigation March 14, and sought documents on past acquisitions, including Allyes, Focus said. The Washington-based body last month accused the Big Four accounting firms of blocking a probe into potential fraud by nine unnamed China-based companies by withholding documents.
Focus agreed in 2007 to pay as much as $300 million in cash and shares for Allyes, then China’s largest Internet ad agency. In January 2010, Allyes and Focus management members paid an additional $13.3 million for a 38 percent stake in Allyes. Six months later, Silver Lake Management LLC purchased a controlling stake in Allyes for $124 million.