Focus Media's privatisation bid hits speed bumps
Focus Media's privatisation bid is likely to be completed, but new difficulties for the deal could reflect waning private equity enthusiasm for such buy-outs.
China's rapidly weakening advertising market may be undermining Focus Media's (Nasdaq: FMCN) ongoing privatisation bid, with word that one of the companies underwriting the buyout may have backed out of the deal. The news, if true, underscores the fact that this kind of privatisation is never easy, and that China's wobbly economy may make future similar buyouts even more difficult. But at the end of the day, I do suspect this privatisation bid will probably succeed since many offshore investors are still quite bullish on China. What's more, Focus Media, despite a recent restructuring, is in the enviable position of being one of China's leading outdoor advertising services firms.
Let's take a look at the latest development, which has domestic media citing an unnamed source saying that China-focused private equity firm CDH Investments has withdrawn from a group that was planning to finance the privatisation of Focus Media first announced in August. CDH was reportedly preparing to invest US$200 million in the buy-out, but withdrew after determining it couldn't get a high enough level of return from the bid.
CDH probably did some calculations and determined that China's accelerating slowdown in its advertising market was unlikely to turn around in the next two years, which would be the likely time frame for this buyout group to resell Focus Media to a longer-term buyer. There are several implications from CDH's withdrawal, both for this individual deal and also for a broader recent trend that has seen a growing number of buy-outs of US-listed Chinese firms.
Let's start with the implications for this particular buyout, which would be largely financed by a group of Chinese private equity sources joined by US giant Carlyle, according to the reports. The buyout, which includes a 15 per cent premium to Focus Media's price before the deal was originally announced, would value the company at about US$3.7 billion. So that means the US$200 million that CDH was prepared to supply is relatively small, amounting to just over 5 per cent of the total value of the company.
A bigger implication in this case is whether CDH represents broader sentiment that may be seeing other investors having second thoughts about this buyout. Such sentiment could be gaining momentum in the last few weeks, after leading Chinese broadcaster CCTV held its big annual advertising auction late last month and saw the slowest growth in demand in more than a decade due to a sharp spending slowdown.
If sentiment is indeed changing, we could quite possibly see other investors in this privatisation bid also have second thoughts, causing the bid to collapse. I suspect that the deal will still get completed, since Focus Media is still a premier name in the industry, making it a desirable asset in the Chinese media space. But shareholders are clearly concerned about the potential for the deal to collapse, with Focus Media shares dropping as much as 9 per cent after the word of CDH's withdrawal was first reported.
The current year had seen a number of other privatisation moves by names like Shanda and Alibaba.com, as private equity investors sought to capitalise on low valuations created by an ongoing confidence crisis towards such companies due to a series of accounting scandals. But these new difficulties being faced by this Focus Media deal could mean that even private equity investors are starting to lose interest in these companies, meaning we may see few if any more similar privatisation bids in 2013.
Bottom line: Focus Media's privatisation bid is likely to be completed, but new difficulties for the deal could reflect waning private equity enthusiasm for such buy-outs.