Focus Media Privatizes, Sale in Sight? 分众私有化，出售在即？
The headlines have been buzzing this week with news of a management-led privatization offer for leading outdoor advertising firm Focus Media (Nasdaq: FMCN), marking the latest in a recent string of developments that I suspect will end with a sale of this colorful but faded company. The buyout is the latest in a series of similar plans by US-listed Chinese firms in recent months, following a series of accounting scandals that have caused shares of the entire sector to tumble.
Let’s look quickly at the plan from Focus, whose founder Jason Jiang built his company into China’s leading outdoor advertising firm through a series of acquisitions over the last 7 years. Under the privatization plan, the management-led group would purchase each of Focus’ Nasdaq-listed American Depositary Shares (ADS) for $27, valuing the company at $3.7 billion and representing a 15 percent premium to the company’s last closing price before the deal was disclosed. (company announcement) Focus Media shares jumped 9 percent to close at $25.45 after the deal was announced, marking the latest twist in a roller coaster ride for the company’s stock over the last few years.
Focus became an investor darling after its initial public offering in 2005, with its shares rising steadily from their $17 offering price to more than $60 in 2007. Investors saw the company, which operates advertising screens in commercial and residential buildings, as a strong play into China’s booming ad market, which was notching strong double-digit gains on the strength of China’s booming economy.
The company’s outlook reached a pinnacle in 2008, when it announced a plan to be acquired by leading web portal Sina (Nasdaq: SINA) for $1.4 billion. But that deal ultimately collapsed a year later after failing to win regulatory approval, starting the beginning of a longer decline for Focus.
It soon became clear that Jiang had overpaid for many of the assets he purchased during his earlier buying binge, forcing him to launch a major clean-up that saw the company’s shares tumble as investor enthusiasm waned. Jiang went on to sell off many of the problematic assets, as market rumors spread that he was looking to eventually sell the company.
The clean-up was largely complete and the company’s share price had recovered when it came under attack last year by short sellers who questioned some of the its practices, including its purchase of a ginseng plantation that appeared unrelated to its core advertising business. (previous post) That attack was part of a broader series of similar short-seller attacks questioning the accounting and business practices of overseas-listed Chinese companies like Longtop Financial and Sino-Forest, sparking a broader sell-off that saw the shares of many lose half their value or more.
A number of companies, including Shanda Interactive and Alibaba.com, felt their shares were being unfairly punished and launched management-led bids to privatization the companies. Focus has now become the newest member of that group, and I suspect we may see several more such privatizations before the end of this year.
But equally interesting is the question of what the future holds for Focus, as I don’t think this privatization is the end of the story. Previous market rumors said that Jiang had lost interest in running his company several years ago, prompting him to pursue the Sina deal that ultimately collapsed. Many expected him to try to sell the company again after cleaning it up, but then any such plans were delayed by the short-seller attacks.
So if this latest privatization is successful, the logical next step would be for Jiang to try and sell the company — a move I would expect within the next 12 months. Potential buyers could include the likes of cash-rich new media firms like Tencent (HKEx: 700) or Baidu (Nasdaq: BIDU), and Focus could even try to reach a new deal with Sina or a traditional media firm like JCDecaux (Paris: DEC). But at the end of the day I do expect we’ll see a sale of Focus by the end of next year, ending the independent life of this former China advertising superstar.
Bottom line: Jason Jiang is likely to try to sell Focus Media following a new privatization bid, with a sale likely by the end of 2013.
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