Focus Media - My Novel Obsession (Corrected Version)

This is a corrected version of a previous post. In the master I transcribed gross margins for operating margins inwards ii companies. The comparing was fair - Focus Media was much higher margin whichever margin I quoted. It is but that I was quoting the wrong margin.

The announced "go-private" transaction for Focus Media has me obsessed. It seems to encompass a whole gamut of my interests, Asian individual equity, alleged Chinese fraud, connections amongst major holding developers in addition to numbers in addition to accounts I discovery surprising. The whole works! It may non hold upwards the most of import affair inwards fiscal markets this twelvemonth - but it is i of the most interesting.

Readers mightiness involve some background here. Focus Media is a display advertising delineate of piece of occupation concern inwards Red People's Republic of China which has analogue in addition to digital poster frames inwards elevators in addition to shopping centers equally good equally LCD screens placing advertisements to a greater extent than generally. Most of these adverts are modest (the LCD screens are mostly 17 inch according to the annual study in addition to many of the posters are smaller). Here are pictures of a few...

(My source for these photos is a Seeking Alpha bull on the stock here...)

H5N1 lot of what used to hold upwards counted equally LCD screens are uncomplicated posters:

The argue for using posters is inconveniences similar having no available powerfulness supply. There has been some dispute close the number of screens in addition to posters but at that topographic point is no uncertainty that the companionship has a lot of these - they are visible roughly major cities inwards China.

The companionship likewise claims to have got the right to sell advertising on a large publish of moving-picture demo movie menage screens. Again at that topographic point is a dispute close the publish of these screens.

The mechanics of Focus's business

Focus Media is a relatively uncomplicated business. They rent sites (for illustration yesteryear entering a lease amongst the managers of a large tower amongst elevators they wishing to house adverts in). They sell the advertising infinite in addition to they keep all their screens in addition to update your posters in addition to bargain amongst the inevitable things similar vandalism, theft in addition to the like. For the publish of sites that Focus deals amongst they would involve a fairly large publish of lowly paid staff for maintenance in addition to some other grouping of staff selling advertisements in addition to a 3rd grouping negotiating lease arrangements amongst edifice in addition to moving-picture demo menage owners. The minute in addition to 3rd grouping volition have got higher salaries.

The maintenance cannot hold upwards neglected because it devalues adverts when kids scrawl piddling goatie-beards on the pictured women (or worse).

The profitability of Focus's business

The most notable affair close Focus from the accounts is their startling profitability. Their the release:

Aug.13, 2012 -- Focus Media Holding Limited ("Focus Media") today announced that its Board of Directors has received a preliminary non-binding proposal letter, dated August 12, 2012, from affiliates of FountainVest Partners, The Carlyle Group, CITIC Capital Partners, CDH Investments in addition to Red People's Republic of China Everbright Limited in addition to Mr. Jason Nanchun Jiang, Chairman of the Board in addition to Chief Executive Officer of Focus Media, in addition to his affiliates (together, the "Consortium Members"), that proposes a "going-private" transaction for $27.00 inwards cash per American depositary share, or $5.40 inwards cash per ordinary share... 

The bidders are a who-is-who of reputable individual equity firms. my doubts close their Red People's Republic of China investments before - but they are large in addition to reputable. CITIC Capital is a individual equity theatre associated with China International Trust in addition to Investment Corporation which is effectively the Chinese sovereign wealth fund. CITIC Capital withal is non the Sovereign Fund - rather an associated individual fund. By all accounts it is Princeling Central. China Everbright is a Hong Kong listed fiscal theatre clearly amongst links to the Chinese establishment. Bo Xilai's brother recently quit as a director. This grouping is a mix of Chinese, other Asian in addition to Western establishment firms.

One depository fiscal establishment mentioned inwards the press release is DBS - which over again represents Singapore Inc. The exclusively other depository fiscal establishment mentioned is Citigroup - in addition to they have got provided a "confident" letter.

So where are nosotros now?

What nosotros have got are some high-profile but rat-bag shorts on i side squealing fraud. And on the other side nosotros have got a who's who of Asian delineate of piece of occupation concern wanting to bring this individual for the not-so-trivial amount of USD3.5 billion.

You run into why I am obsessed? Right upwards my alley. And possibly a exam of my Guanxi vs Analyst thesis.

Is this a done deal?

This sounds similar a done-deal. The largest shareholder inwards Focus is Fosun International - an HK conglomerate. They have got publicly called the bid "attractive". The bid squad contains Mr. Jason Nanchun Jiang - the CEO/Founder of Focus - in addition to a human being critical to the running of the delineate of piece of occupation concern (apart from anything he controls the variable involvement entity). Given that it contains the critical soul in addition to the primary shareholder wants to accept it is probable the board volition become along. And the bid is inexpensive plenty that it is unlikely that - absent absolutely grotesque fraud - zilch that is found on due diligence will dissuade the buyers.

The parties are rich plenty that $3.5 billion is a large - but non an intolerably large bite. They are upwards for it.

It is withal dependent champaign to due diligence. The missive of the alphabet sent yesteryear the buyers to the companionship is attached to the press release. The final paragraph says it clearly:

13. No Binding Commitment.  This missive of the alphabet constitutes exclusively a preliminary indication of our interest, in addition to does non constitute whatever binding commitment amongst observe to the Acquisition. H5N1 binding commitment volition final result exclusively from the execution of Definitive Agreements, in addition to and thus volition hold upwards on damage in addition to weather condition provided inwards such documentation.

And thus nosotros have got a due-diligence catamenia inwards which some of the most reputable in addition to largest individual equity firms volition produce due diligence on a companionship that i of the most famous rat-bag short-sellers asserts is a fraud.

Oh to hold upwards a fly-on-the-wall

I would dear to hold upwards a fly-on-the-wall equally they function out how to exam the Muddy Waters allegations. Due diligence is sometimes (incorrectly) treated equally a formality. But inwards this illustration the stakes are real. Billions of dollars are on the delineate in addition to the rattling credibility of some firms (especially Carlye) are on the delineate amongst it. Carlyle has been burnt yesteryear some frauds inwards Asia before. If - later alert yesteryear Muddy Waters - Carlyle were to purchase this theatre in addition to it turned out to hold upwards fraudulent the interrogation would arise equally to whether Carlyle staff were deliberately buying frauds to loot the Carlyle funds. My approximate is that the rattling being of Carlyle is at stake.

But Carlyle have got competent staff laced throughout their organization. They volition produce their due diligence - in addition to if the bargain closes I mean value you lot tin presume that Muddy Waters was wrong.

If the bargain doesn't unopen amongst the backing of the the largest shareholder in addition to at this pricing in addition to thus you lot likely have got to conclude that Muddy Waters is right. If Muddy Waters is right in addition to thus the revenue in addition to the margins of this theatre are grotesquely overstated in addition to the stock is likely going to settle somewhere below ii dollars.

And amongst that you lot empathize my obsession.






John

Disclosure: I mean value at that topographic point is a reasonable run a peril that Carlyle - in addition to possibly some of the other firms inwards this syndicate volition walk. In all honesty I have got no stance whether they volition or non but equally the stock volition current of air upwards at $2 (or less) if they walk the bet is worth taking. So I am curt in addition to peril losing the departure betwixt the electrical flow toll (25 in addition to change) in addition to the bid toll (27) if the bargain does close.