Will the Deal Go Through Despite Carson Block's Accusations?
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Since announcing in August that it was in talks to be taken over by a well-known American leveraged-buyout firm, Hong Kong-based Focus Media Holding (UNKNOWN: FMCN.DL) has endured months of stock price volatility and corporate uncertainty. Spearheaded by the Carlyle Group (NASDAQ: CG), the proposed bid involves several major Chinese private-equity firms and is currently valued at about $3.5 billion.
Focus Media is a digital advertiser with an extensive portfolio of Chinese outdoor advertising assets. It primarily operates LCD billboards and other high-tech signs and window displays. Supermarket advertising remains a significant component of its business. It also runs ads and trailers before many movies released on the Chinese market. All told, the company owns over 150,000 outdoor billboards, over 50,000 indoor billboards and nearly 500,000 poster-style displays. Its trade area encompasses over 100 major Chinese cities. FMCN is an ADR that trades on the Nasdaq and has Citibank as its depository bank.
Despite its enormous digital footprint, Focus Media employs just over 6,000 individuals. However, it appears to be in a strong financial position at the moment: In 2011, it earned over $200 million on total revenues of less than $940 million. This represents a profit margin north of 20 percent. Due in large part to skepticism about the pending deal's viability, Focus Media's stock currently trades at a PE ratio of less than 10.
It’s a Big Deal
If the all-cash deal goes through, Focus Media will become the largest-ever U.S.-traded Chinese company to be taken private. The Carlyle Group has proposed buying all outstanding Focus shares for $27 per share. This represents a 15.5 percent premium to Focus Media's $23.38 closing price on the final trading day before the August 12, 2012 announcement. However, rumors of a deal had been circulating for at least a week before the official announcement. Measured from Focus Media's August 1 low of $18.91, the buyout offer represents a premium of nearly 45 percent.
The proposed takeover of Focus Media involves multiple buyers and a significant loan facility. Since announcing the deal, the Carlyle Group has secured multiple streams of financing underwritten by Citigroup and Credit Suisse. These loan facilities total $1.65 billion in the aggregate. Despite the recent defection of Beijing-based CDH Investments, the deal's other Chinese partners remain on board. Further, the extension of such a significant amount of credit to finance the deal indicates that major Citibank and other U.S. banks have high hopes that it could spur a wave of similar deals.
Accusations by Short Sellers
On the other hand, investors' skepticism about the Carlyle Group's bid for Focus Media remains palpable. Since the deal's August announcement, the company's stock has flat-lined. Much of this unease is due to a bombshell accusation leveled last year by notorious short seller Carson Block. Through his Muddy Waters investment firm, Block alleged that Focus repeatedly overpaid for properties and assets that it acquired during the 2000s. He also charged that the company systematically covered up these bad deals using questionable and perhaps fraudulent accounting methods that overstated the value of the properties in question.
Mr. Block has profited handsomely from his boldness. After releasing a report that detailed these allegations, his firm mounted an aggressive short-selling campaign that briefly devalued Focus Media's stock by nearly 50 percent. Although the stock has since recovered about half of its pre-scandal value, it remains highly volatile and unfriendly to retail investors.
It remains difficult to ascertain the veracity of Mr. Block's charges. Focus Media's management team points to inconsistencies within the Muddy Waters report as evidence that the charges are baseless. Meanwhile, the company enjoys a solid cash flow and steadily-increasing revenues. Many investors see the Carlyle Group's proposed takeover as a keen bid to snap up a relatively strong company during a transitory period of uncertainty. At its current levels, Focus Media represents a relative bargain for investors looking to profit from the deal.
The proposed takeover is still awaiting approval from Focus Media's board of directors as well as its shareholders. Given that the Carlyle-led consortium appears willing to pay a significant premium for the company relative to its current stock price, it appears likely that both classes will accept the deal. However, further defections by parties to the buyout could yet delay or scuttle the deal. In addition, renewed downward pressure from Muddy Waters or another short seller could render the deal less attractive and lead to a renegotiation of its terms.
Barring any of these complications, the deal appears likely to close during the first quarter of 2013.
mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!