Focus Media: 1 Foreign Disclosure, 3 Interpretations

Here is a disclosure from the Focus Media 20F filing:

2009 Disposition

In 2009, nosotros aborted a contemplated initial populace offering for its Internet advertising segment due to the economical recession inwards belatedly 2008. As a result, betwixt August as well as Dec 2009, nosotros disposed of vi underperforming subsidiaries inwards that segment through a serial of private transactions alongside their respective master copy owners. Each of the subsidiaries was considered a constituent of our company, as well as their results receive got been included inwards discontinued operations inwards the consolidated statements of operations. The results of discontinued operations include network revenues as well as pretax losses of $127.6 i thou 1000 as well as $45.4 million, respectively, related to these subsidiaries. We recorded a loss on disposal of $44.1 million.

The next tabular array summarizes the acquired subsidiaries inwards the mobile handset advertising services segment as well as Internet advertising segment that were sold dorsum to their master copy owners inwards 2009:

		Acquisitions		Date of acquisition				Business segment		Proceeds paid				Date of Disposal				Loss on disposal
1.		Catchstone(1)			2007-4-16			Internet advertising		$	14,489,647				2009-12-22			$	11,560,617
2.		WonderAd(2)			2007-9-15			Internet advertising		$	14,926,003				2009-11-30			$	14,926,003
3.		Jiahua(3)			2007-8-15			Internet advertising		$	7,659,158				2009-12-1			$	7,659,158
4.		Wangmai(4)			2007-9-1			Internet advertising		$	2,749,158				2009-12-14			$	2,749,158
5.		Jichuang(5)			2007-12-1			Internet advertising		$	366,032				2009-8-24			$	366,032
6.		1024(6)			2008-3-1			Internet advertising		$	3,397,124				2009-12-18			$	3,397,124
7.		Dongguan Yaya(7)			2007-10-1			Mobile handset advertising services		$	1,540,612				2009-2-28			$	1,588,110

(1)	The master copy sellers which afterward repurchased Catchstone were Only Education Holding Limited as well as Maxnew Holdings Limited, BVI companies owned past times a unmarried PRC private unrelated to our company.

(2)	The master copy seller which afterward repurchased WonderAd was Megajoy Pacific Limited, a BVI fellowship ultimately owned past times 7 PRC individuals unrelated to our company.

(3)	The master copy sellers which afterward repurchased Jiahua were 2 PRC individuals unrelated to our company.

(4)	The master copy seller which afterward repurchased Jichuang was Richcom International Limited, a BVI fellowship owned past times a unmarried PRC private unrelated to our company.

(5)	The master copy sellers which afterward repurchased Keylink Global Limited were 4 PRC individuals unrelated to our company.

(6)	The master copy sellers which afterward repurchased 1024 were 2 PRC individuals unrelated to our company.

(7)	The master copy sellers which afterward repurchased Dongguan Yaya were Sinoalpha Limited as well as Max Planet Limited, BVI companies each of which is owned past times a form unmarried PRC private unrelated to our company.

I desire yous love readers to read as well as endeavour to sympathize this disclosure.

It says that nosotros (Focus Media) were planning to IPO our cyberspace advertising segment but nosotros aborted that innovation "due to the economical recession of belatedly 2008". In other words nosotros idea they were businesses worth taking to IPO.

Instead nosotros took 7 of our businesses as well as disposed of them at losses.

Six of them nosotros disposed of to the master copy owner.

WonderAd as well as several others were given to the master copy owners. 14,926,003 dollars was paid for WonderAd. That was also the loss on disposal - hence presumably the line of piece of job organisation was given dorsum to the master copy owner. Same is truthful of Jiahua, Wangmai, Jichuang as well as 1024. Donggyuan Yaya was also given away.

There was a loss on disposal of $44.1 i thou 1000 from these subsidiaries.

Prior to disposal these subsidiaries had $127.6 i thou 1000 inwards revenue as well as $45.4 i thou 1000 inwards pre-tax losses. So they were large revenue earners - but presumably they had over $170 i thou 1000 inwards costs. In Communist People's Republic of China where reward are depression that is a lot of costs - they seem to receive got been large operations alongside a lot of staff.

Because they had large losses ($45.4 i thou 1000 pre-tax) as well as they did non collapse I presume that Focus Media injected a swell bargain of cash into the subsidiaries before it gave them dorsum to the master copy possessor for whom in virtually cases the ownership vehicle was an untraceable British Virgin Islands company.

I receive got 3 possible interpretations - as well as without doing due diligence I could non easily endure surely which (if any) is the right interpretation.

Interpretation A: the accounting statements are exclusively accurate

In interpretation Influenza A virus subtype H5N1 the accounts are exclusively straight. Focus Media purchased many independent British Virgin Island companies running cyberspace advertising businesses inwards China.

These businesses had good over $100 i thou 1000 revenue.

However they all failed as well as cash - in all probability $40 addition i thou 1000 - needed to endure used to fund operating losses.

Given the (not inconsiderable) hurting of funding those operating losses they wanted to closed the businesses. But rather than closed them they industrial plant life that the master copy owners were happy to bring them dorsum for no consideration. Presumably the master copy owners tin forcefulness out fund the losses as well as know how to plough the businesses around.

So they gave the businesses dorsum to their master copy owners for no consideration as well as closed the mass on the whole sad saga.

Interpretation B: Focus Media management participated inwards the looting of Focus Media

These businesses were proficient or bad or peradventure fifty-fifty non-existent. However over $40 i thou 1000 dollars was paid for the businesses as well as the businesses were given dorsum to the master copy possessor (making the master copy owners $40 i thou 1000 ameliorate off). Moreover a farther $40 i thou 1000 was injected into the businesses to but cipher upward the scale of the looting to something fifty-fifty to a greater extent than attractive for the thieves.

That is why yous would hit it inwards the British Virgin Islands. No taxation to pay on stolen coin - as well as the companies are untraceable. Yipee!

Interpretation C: The coin was never there, the losses are faux as well as they are used to launder faux profits

In interpretation C, Focus Media reports faux profits over its principal businesses. These faux profits effect inwards faux cash on the residue canvass (something that is easily industrial plant life past times auditors). So they hit faux losses to offset them.

What ameliorate agency to faux losses than purchase or hence businesses, receive got operating losses as well as write them off?

And where ameliorate to locate the faux businesses but the British Virgin Islands where they are untraceable?

In this interpretation the underlying profitability of Focus Media is grotesquely overstated. When the faux transactions halt the faux losses halt as well as the faux profits instruct revealed. The pitiable private equity buyers (and the suckers who lent them 1.5 billion dollars) are left belongings a turkey.

Summary

As I said it is real difficult to tell which interpretation is right without doing due diligence. But due diligence is going to endure real difficult because the losses are buried inwards untraceable British Virgin Island subsidiaries. I promise Focus retained plenty documentation to verify the commence interpretation - as well as I promise the auditor has traced the BVI subs. Moreover I promise the master copy owners tin forcefulness out endure found.

Which interpretation is industrial plant life to endure right nether due diligence matters a lot for the take-private deal.

The commence 2 interpretations are acceptable to the PE buyers as well as if either is truthful the bargain volition in all probability close.

If the acquisitions were bad (as per the commence interpretation) as well as hence the PE buyers tin forcefulness out halt that prospectively. After all PE buyers tin forcefulness out hit due diligence and do non receive got to closed bad acquisitions.

If the fellowship was looted (as per the bit interpretation) as well as hence the PE buyers tin forcefulness out halt that prospectively - after all Carlyle as well as Fountainvest should endure competent to construct rigorous financial command of businesses that they acquire.

The tertiary interpretation is utterly terrible for Focus Media stock. In that example Focus Media is a Chinese display media fellowship that uses real complex BVI transactions to faux their profits. Real profitability would endure depression - but ultimately unknowable. The privatisation volition neglect nether due diligence.

Moreover what is left would endure a Chinese display media fellowship which fakes their accounts using untraceable BVI entities. What is that worth? Certainly far less than the electrical flow multi-billion dollar marketplace cap.

Now of course of study off the disclosure I can't tell which of these 3 interpretations is correct. But if the bargain fails as well as hence intellectually yous are led to the tertiary interpretation. The upside for the stock is to $27 - the bid price. The downside? Large.


John