Focus Media Holding Limited (FMCN): Will the Deal Go Through Despite Carson Block’s Accusations?

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 Limited (NASDAQ:FMCN) has endured months of stock price volatility and corporate uncertainty. Spearheaded by the Carlyle Group LP (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.

Focus Media Holding Limited (NASDAQ:FMCN)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.

The article Will the Deal Go Through Despite Carson Block’s Accusations? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!