Monday, September 10, 2012

Focus Media giving away cash?

I am becoming obsessed by the disclosures about the businesses Focus Media disposed of in 2009. The full disclosure is in this post - and an explanation as to why Focus Media's accounting must be wrong is in this post.

But to summarize - Focus Media disposed of seven businesses in 2009.

All businesses were disposed of at a loss.

Six of these businesses were given away for no consideration at all. In one consideration of a low single digit number of millions of dollars was paid.

A majority of these businesses were given back to their original owners.

A majority of these businesses are in British Virgin Islands subsidiaries.

And the accounting for these transactions is messed up.

That said, the cash flow statement from the latest 20F provides more information.

Here is a section from the cash flow statement:



Investing activities:
Purchase of equipment
Cash of disposed subsidiary
Proceeds from sale of a subsidiary
—    116,872,231  7,296,097  
Purchase of subsidiaries and earn-out payment paid to acquire subsidiaries, net of cash acquired
Investment in an equity method investee
—    —    (61,003,263
Deposit refunded to acquire subsidiaries
329,516  —    —    
Proceeds from disposal of fixed assets
196,115  471,128  671,950  
Increase in restricted cash
—    —    (199,346,126
Cash paid for short-term investments
Sale of short-term investments
865,589  29,290,296  1,044,680,415  

Net cash used in investing activities

I want you to notice the highlighted line...

In those susbsidiaries disposed of in 2009 there was embedded 27,315,949 dollars in cash.

These subsidiaries were given away.

If you interpret the accounts literally this company has been giving away cash.

I have a handful of explanations for this behaviour but plausibility is becoming strained. Perhaps Focus Media's investor relations department can help (I have sent them this post in advance but have received no reply).

Anyone else with an explanation could you please put it in the comments.



Anonymous said...

Completely different circumstances (i.e.well publicised / third party, but note investment in LP) where they gave away cash (or at least that's how I read it)

note 11.

Could have been working capital adjustments etc? Perhaps they'd got cash in advance (deferred income) which had been passed up to the holding company and this was it returnign in order for the buyers to take the business on.

although TBH i'm with you.

Nick said...

The Kesa example is perfect.
There is nothing special about the value zero.
Some things are worth more than zero and some worth less.

In fact it would be a mind-bogglingly unlikely scenario for those six given away to be worth precisely zero.

Clearly several were worth less than zero - hence you give the buyer some cash.

For Kesa shutting down Comet was going to cost MORE than giving it to someone else and bunging them £50m or whatever.
It was still a rational move for Kesa to dispose of Comet.

Anon said...

You better stop snooping...did you see the article on the guy who was investigating $SVM and got arrested and other crazy happenings such as death threats, etc??

Graham said...

John, you are correct.

They are giving away the cash instead of taking a loss on it.

For example the subs assets are as follows:
PPE / goodwill: $8m
Cash: $2m

Loss on subsidiary: $8million
Cash of disposed sub: $2million

Universal Travel Group has the same thing, but funny enough, UTA actually has better disclosure. I bet you never thought you would hear that.

See UTA supplemental cash flow information. Q2F09

DK said...

John, I admire some of the Chinese frauds that you have helped to uncover in the past. But I fear you're missing the bigger picture here:
1. Focus Media has a legitimate business (I've been travelling in China the last 10 days and their screens are everywhere) and a decent one at that.
2. Shanghai Fosun bought 17% of Focus Median in the open market in 2008-2009. These guys are pretty much the ultimate Shanghai "insiders", buying into the company of a fellow Shanghainese (Jason Jiang). Not good people to defraud right?
3. There are some other very sophisticated shareholders on the shareholders roll who are unlikely to accept what appears to me a very low-ball offer. (See WSJ article highlighting Eastspring won't accept less than $30).

I suspect your bet is far less assymetric than you think.

Disclosure: I have no exposure to FMCN

John Hempton said...

Fosun has said this deal is attractive. World is complex. Be careful.

I have a position in FMCN. Short. Long puts. But then you knew that.


PS. I started this whole series by saying this company had a highly visible real business with strange accounts.


Anonymous said...

If the company is really a fraud, isn't long put is dangerous as the company could go unlisted or trading halted. if you don't think so, which puts offer the best payoff?

John Hempton said...

You exercise the puts when suspended.

Tom said...

John is fairly nonchalant about shorting frauds. But I can tell you that it's quite nailbiting to hold long puts on a fraud.

When a stock gets halted, all the put-holders will be scrambling to exercise before the inventory of shares run out. In the case of Longtop, the shares lasted about two weeks.

But the earlier you exercise, the more it costs. Most of these fraud stocks are heavily-shorted, and have borrow rates approaching 100%. Plus, your broker will require you to put up margin -- at the inflated price **PRIOR** to the halt.

Finally, after the stock gets delisted and moves to OTC, you will have to wait some time to close out your short. The stock will spike up on the first day, as all the shorts attempt to buy in at the floor. Heavily-manipulated stocks might take months to fall below the opening price. In the case of AutoChina, it is *STILL* trading above the opening price on OTC, a year later.

Bottom line -- the stock market is setup for longs, not for shorts. When a stock is halted, the regulators aren't thinking about how to allow shorts to cash out. Remain aware of this at all times, and decide when the opportunity is worth the risk.

John Besant-Jones said...

The cash numbers you highlight most likely do not relate to the several subsidiaries that were disposed for a zero amount. This cash looks like it is primarily the deconsolidated cash amounts relating to the Allyes disposal, which is also part of internet advertising business but separate to the several other internet advertising agencies that you are concerned about. When a business is sold, their numbers are deconsolidated, and it seems this is what happened.

The highlighted 2010 number of $40,805,068m is similar to the $40,665,131m cash contained in Allyes for that same year. This is shown in the notes for the 2010 20F (Amendment No. 4) filings, on page F19. The notes to the accounts do not show the cash in Allyes for 2009, but it is reasonable to conclude that the 2009 cash amount of $27,315,949m that you highlight was the deconsolidated cash held in Allyes for 2009.

Further evidence is in the wording, which says “Cash on disposal of subsidiary”, instead of “subsidiaries”. Although the internet advertising businesses that were written down to zero were originally consolidated in to Allyes, they were later sold individually and separately from Allyes. Hence if these several other business really did hold the cash, then the wording “subsidiaries” would have been used instead of “subsidiary”. The remaining part of Allyes was sold as one unit (to separate shareholders), which is consistent with the wording “Cash on disposal of subsidiary”.

This cash was not given away on disposal. In 2009, a 38% holding in Allyes was sold for $13.3m to employees, and the remaining 62% was sold to Silver Lake LLC for $124m. There was also a gain made on that disposal of $78,999,821, so it was not written down to zero.

Finally, if there really was cash held in these other subsidiaries, then their book value could not have been written down to zero, since the book value would have contained cash, which has value. The exception to this would be if there were also liabilities contained in these other subsidiaries that had equal offsetting values to the cash, but if this was the case, then the cash was not given away for free since it offset these liabilities.

I have researched a lot of Chinese accounting frauds and irregularities, so contact me if interested. I can be found on LinkedIn.

John Besant-Jones

John Hempton said...

The 2010 number is Allyes. But the first partial sale of Allyes was in Jan 2010 - so the 2009 number cannot include any Allyes.

I did not raise the 2010 number which scans out.


Anonymous said...

regarding the put, i think as lng as the put doesnt expire while the share being suspended it will be ok. if the share is suspended, my guess it will start trading again (potentially on pink sheet if delisted) within a month. so as long as the put has a couple of months from expiration, it will be fine. then, you could buy the stock and excercise the put, so no borrow cost or magin requirement involved.please correct me if i am wrong.

Anonymous said...

Loss on disposal of a subsidiary in the holding company's accounts is simply the proceeds less the carrying value. If the proceeds are zero then the loss must equal the carrying value, i.e. the cost of investment (assuming no prior impairment charge). Whilst there are other matters to explain, the nexus of this argument is wrong.

John Besant-Jones said...

The Allyes disposal did take place in 2010, and not 2009. Thanks for pointing that out.

However, the numbers for 2009 will still also be restated to reflect a full deconsolidation, even though the disposal took place in 2010. So that 2009 highlighted cash almost certainly still belongs to Allyes.

Anonymous said...

Re. Buying puts.
My personal experience with Interactive Brokers (IB) is that there is no problem exercising puts at expiration on a halted stock.
I've done it with CCME, CHBT, UTA, Longtop, et al. Note that UTA was halted for over a year before finally moving to the pinks.
Since the last traded price is often above the exercise price, you will need to explicitly instruct the broker that you wish to exercise at expiration.
I did get a buy-in notice from IB immediately after exercising my June 2011 CHBT puts, but they obviously couldn't do anything about it until the stock was relisted on the pinks (ie. by exercising, I was holding a short on a stock that my broker couldn't borrow).
However, from reading Yahoo Message Boards I get the impression that some brokers won't allow you to exercise puts on a halted stock.
It might be a good idea to check with your broker and/or open an account with IB.

John Hempton said...

John Besant-Jones

That cash in 2009 cannot be Allyes.

They did not have any transaction at the end of 2009 to deconsolidate Allyes. The first partial sale was in 2010.

So if it was Allyes - they knew in 2009 they were going to sell Allyes - and they wrote the cash out without the transaction - bizarre.

No - the 2010 transaction and cash disposed of in subsidiary is Allyes according to the accounts.

The 2009 cash - something different.

Tom said...

@Anonymous (September 11, 2012 10:15 AM):

Yes, if you hold puts that are far-enough out, then you can ride out a trading halt without exercising. You just wait to buy it OTC, and exercise to close.

The trick is to have great timing, because long-dated puts on the Chinese RTOs could get really expensive.

The nice thing about FMCN is that the long-dated options are so cheap. It helps that it's a merger arb situation -- and that the HRBN deal closed.

Tom said...

@the other Anonymous (September 11, 2012 1:24 PM)

TD really screwed a lot of shorts on CCME, by doing a forced buy-in during the first five minutes of OTC trading.

Interactive Brokers is better at locating shares, but even IB isn't a panacea. Longtop became hard to borrow at IB about two weeks after the halt. On some days, only a couple thousand shares were available -- and they got snapped up within minutes. On other days, not a single share.

John Besant-Jones said...

It is an SEC reporting requirement. When a business is disposed, the historic numbers in the previous year are also restated or separated out; The adjustments are retrospective for the prior year, and not just during the year that the disposal took place.

This is so users of the accounts get a like for like comparative of the remaining business.

I refer you to the SEC Financial Reporting Manual. If you still do not agree, then maybe we should continue this offline.

John Hempton said...

John Besant Jones

It is not a restatement...

Is the 20F for the 2009 year BEFORE they deconsolidated ALLYES. And the same 27 million is there.

So in this case you are flat wrong. (Happens to the best of us...)


John Besant-Jones said...

Not so fast, John.

FASB 144, sub-paragraph 43 states: “In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise (or statement of activities of a not-for-profit organization) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraph 37, in discontinued operations“. Note the “held for sale” and “prior periods” wording.

At the top of page 59 for the 2009 20F Filings Amendment Number 4, dated 12th December 2010, it says “On July 30, 2010, we entered into a definitive share purchase agreement with Asteroid Media Holdings Limited, a wholly-owned investment vehicle of Silver Lake Management, L.L.C., or Silver Lake, pursuant to which we sold to Silver Lake our entire remaining 62% ownership interest in our former Internet business, Allyes Online Media Holdings Limited and its consolidated subsidiaries and affiliates…………We no longer hold any ownership interest in Allyes nor conduct any Internet advertising operations.”

Therefore even though the disposal took place in 2010, the 2009 20F filings are still amended retrospectively as a “prior period” to reflect the fact that Allyes will no longer part of the group. Hence the reason for the inclusion of a 2009 cash amount for disposed subsidiaries that primarily relate to Allyes. It looks to me like the original 2009 20F filings had the balance sheet adjustments for the proposed Allyes disposal, but did not contain the right notes. Frankly, I must admit these filings do look chaotic.

As you eagerly point out, at the time of the original version of the 2009 20F filings, dated 29th June 2010, Allyes had not been fully disposed, but given that the business was fully sold only one month later, and was already partly sold in January 2010, then it is highly likely the management had already decided to sell Allyes at the date of the original 20F filiings, and the assets would be placed under the umbrella of discontinued operations because at the time they were being “held for sale”. In fact, the company had already tried to dispose of Allyes via an IPO as early as September 2008. For assets “held for sale”, the FASB 144 requires a separation of numbers for 2010 and prior years, including 2009.

Your version of the 2009 20F filings, which are from Edgar, appears to exclude the notes I quoted on page 59 but it does show the separate cash amounts. I assume that Amendment Number 4 was meant to include these notes. I got mine from the Nasdaq SEC filings page for Focus Media.

Also, if what you are saying is correct, then you have still not explained why these several other internet advertising businesses that were sold had a zero book value, but still had this $27,315,949 cash.

John Besant-Jones

John Hempton said...

John - you are flat wrong here. The accounts as stated at the end of the year 2009 had that transaction - it is NOT a restatement.

When those accounts were written the asset was NOT HELD FOR SALE.

They did not have a bid for it. They had not announced or disclosed an intention to sell it.


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