7 Days privatisation moves ahead, Focus Media sputters
7 Days' privatisation bid stands a strong chance of success following a definitive offer, while prospects are rapidly fading for a similar bid by Focus Media
Two major privatisation plans of US-listed Chinese companies appear to be moving in different directions, with hotel operator 7 Days (NYSE: SVN) moving closer to its plan to de-list even as outdoor advertising specialist Focus Media's (Nasdaq: FMCN) plan appears to be derailing. Both companies launched their plans last year at the height of a confidence crisis for US-listed China stocks that saw many companies' shares fall sharply.
Other companies that have successfully privatised already include online entertainment specialist Shanda Interactive, as well as Grentech. Top managers at all the companies believe their shares are undervalued by investors, hence the bids to take their companies private at what they believe are bargain prices. But the problems Focus is facing reflect the reality that these privatisations are often quite complex, as they require the raising of hundreds of millions or even billions of dollars in financing to complete.
On that note, let's start with a look at Focus, which announced its privatisation bid last August. At one point the company said it had all the necessary funding commitments for its buy-out, which was valued at more than US$3 billion. But then reports appeared saying some of the investors were having second thoughts and were considering pulling out of the deal.
No reasons were ever given for the fading confidence, but a rapid slowdown in China's advertising sector since last fall was probably a factor. In the latest development, media are reporting that Focus has raised just $250 million of a $1 billion syndicated loan it will need to complete the transaction. As a result of the big shortfall, Focus, whose bid is being backed by private equity giant Carlyle, has had to extend its target period for closing the deal as it seeks more investors.
It's difficult to know what is happening behind the scenes, but I suspect that the weak ad market and also Focus' large market cap are big factors working against this deal. Focus shares are now trading at just over $25, which is still close to the $27 buyout price. But the deal does appear to be in danger of collapse in the next few months, which could result in a sharp decline for Focus shares.
Meantime, 7 Days' bid, announced last September, is moving forward with the company's new announcement of a definitive agreement from an investor group backing the deal. Carlyle is also a member of the investor group in the 7 Days bid, along with another private equity firm Sequoia Capital. The deal is also being backed by a group of Taiwanese banks, which are providing a $120 million loan. 7 Days said it expects the deal to close in the second half of the year.
Unlike Focus Media, 7 Days has a much smaller market cap, about $670 million, which probably made it easier to find financing. The company is also in a completely different sector, in this case hotels, where the effects of China's economic slowdown aren't as serious as that seen in the advertising industry. For those reasons, I would give the 7 Days deal a strong chance of success, with an 80 per cent chance of closing. But I would put the chances much lower for Focus Media, perhaps at just 30 per cent.
Bottom line: 7 Days' privatisation bid stands a strong chance of success following a definitive offer, while prospects are rapidly fading for a similar bid by Focus Media.
To read more commentaries from Doug Young, visit youngchinabiz.com