BUYOUTS: Focus Media Raises Cash at Rich Value in China Homecoming

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Bottom line: Focus Media’s first major fund raising and lofty valuation following its backdoor listing in China shows such homecomings can be lucrative, but are also very time consuming, complex and not guaranteed to succeed.

Focus Media in first cash raising since backdoor listing

Focus Media has just announced its first major cash-raising exercise since its privatization from New York and return to China through a backdoor listing, and the results look quite encouraging. The company said it plans to raise 5 billion yuan, or nearly $800 million, by issuing new shares after making the homecoming through a shell company called Hedy Holdings (Shenzhen: 002027).

But what’s really impressive is the valuation that Focus, a provider of advertising services, has gotten as it leads a group of Chinese companies that are abandoning New York listings to return home to China. According to data from 2 reputable websites, Hedy Holdings now has a market value of 150 billion yuan, or about $23 billion. If that’s correct, it would be nearly 6 times what Focus was worth when it launched its plan to privatize in 2012.

We’ll return to the valuation question shortly, and what it could mean for the dozens of other companies that have either recently de-listed from New York or are in the process of doing so. But first let’s review the latest headlines, which say that Hedy, which will probably change its name soon to Focus, plans to issue about 253 million new shares at a price of 19.8 yuan apiece. (company announcement; Chinese article) That amount would raise about 4.7 billion yuan.

Buyers of the newly issued shares are mostly big institutions, including an insurance company and several domestic fund managers. These are exactly the kinds of institutional investors that would probably love to buy into companies like Focus, which are from the private sector, profitable and have a longer operating history than most other publicly traded companies with similar background in China.

What’s interesting is that the price these buyers are paying for the new shares is sharply lower than Hedy’s latest stock price of 34.32 yuan. Specifically, the price they’re paying represents a discount of more than 40 percent to the current stock price. Thus it’s probably fair to say that the 19.8 yuan price is a more accurate representation of Focus’ value following the backdoor listing.

Based on that lower price, Focus would still have a market value of nearly $10 billion. That’s still more than double the $4 billion that Focus was worth when it first announced its de-listing plan nearly 4 years ago. Perhaps we can assume the stock would have risen about 10-15 percent each year if Focus had stayed in New York, meaning the company would have been worth nearly $7 billion now if it were still traded on the Nasdaq.

Big Effort, Healthy Premium

That means that Focus’ new value is still nearly 50 percent higher than what it would be worth in New York, at least based on all of my assumptions. Even if we add in other factors, such as the value of Hedy’s own assets before the backdoor listing, Focus is still getting a nice premium by listing in China compared with what it was getting in New York.

But we should also point out that the road back to China was a difficult one for Focus. Its US de-listing took around 2 years due to financing problems. And once it finally decided to make a backdoor listing in China, its first deal ultimately collapsed due to problems with the first shell company it targeted.

Focus is probably a somewhat exceptional case, since its founder and chief Jason Jiang is a very strong-willed and resourceful individual. Other companies might have given up after facing similar setbacks. A few other companies have similarly strong-willed founders, such as Qihoo 360’s (NYSE: QIHU) Zhou Hongyi, who is in the process of executing a similar plan. Those kinds of people have the patience and resourcefulness to ultimately make this kind of backdoor listing succeed. But the complexities and other difficulties could discourage many other companies from trying a similar route.

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