Focus Media Holding Ltd. (FMCN:US), a Chinese advertising company, received a takeover proposal from private- equity firms including Carlyle Group LP (CG:US) 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. That’s 15 percent more than the stock’s Aug. 10 closing price and values Focus Media, which trades on the Nasdaq Stock Market, at about $3.5 billion, according to data compiled by Bloomberg.
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.”
Chinese stocks trading in the U.S. have faced investor scrutiny since last year after companies such as China MediaExpress Holdings Inc. (CCME:US) disclosed financial irregularities or auditor resignations. Carson Block, who runs short-selling firm Muddy Waters LLC, helped fuel some of that scrutiny with reports on corporations including Rino International Corp. and Sino- Forest Corp., the timber company that traded in Canada.
Muddy Waters in February issued a fifth report that said Focus Media overstated its ad network. Short sales involve borrowing a stock or bond and then selling it in anticipation of a price decline.
Some companies that were the subjects of research by short sellers rose in U.S. trading yesterday. In Hong Kong, stocks that fell after research reports by short sellers include Evergrande Real Estate Group Ltd. (3333), Winsway Coking Coal Holdings Ltd. (1733) and China Yurun Food Group Ltd. (1068)
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.
“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.”
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 company’s bullish options (FMCN:US) trading jumped to the highest level since November on Aug. 10. More than 29,000 calls to buy the stock changed hands, 5 times the four-week average, compared with 7,635 for puts to sell.
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.
The American depositary shares rose (FMCN:US) 8.9 percent to $25.45 in New York after earlier jumping as much as 13 percent. Focus Media has about 129.3 million ADRs outstanding.
Universal Travel Group (UTRA:US), whose financial statements and business model were questioned by Glaucus Research Group last year, climbed 47 percent to $1, advancing 85 percent in 3 days. Duoyuan Global Water Inc. (DGWIY:US), rated a “strong sell” by Muddy Waters when it initiated coverage in April last year, rallied 11 percent to 30 cents.
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