Wednesday, September 12, 2012

Chinese due diligence: Focus Media style

Yesterday's post again raised this disclosure from Focus Media:

In March 2006, Weiqiang Jiang, the father of Jason Nanchun Jiang (the CEO/controller of Focus Media), provided a short-term loan to the Group of approximately $2.5 million to relieve a temporary shortage of Renminbi the Group experienced at that time. The loan is unsecured and was provided to us at no interest. The loan will become due and payable in full on June 30, 2006.

The key words here are "relieve a temporary shortage of Renminbi the group experienced".

Approximately two months prior there was a capital raise which raised $295 million. Of that $62 million went to the company and $220 million went to selling shareholders. The remaining $13 million went to the underwriters.*

A looming "shortage of Renmimbi" looks like material information that should be disclosed in a prospectus.

Well it wasn't. Indeed the prospectus made clear that the company had plenty of Renmimbi liquidity but might be short US dollar liquidity to pay dividends of the like.

Without a better explanation (which I have sought) I would think there may be material non-disclosure.

So who were the selling shareholders?

It is interesting to me when $220 million in stock is possibly sold on material non-disclosures. I want to know who the sellers were.

One of the biggest (but not the biggest) selling shareholder was JJ Media Investment Holdings - the vehicle of Jason Jiang, CEO/Controller of Focus Media.

Most of the other selling shareholders were prior shareholders of Target Media which was sold to Focus Media mostly for stock. Those sellers were not insiders so they can't be held responsible for material non-disclosure in the prospectus. Nonetheless it is amusing selling shareholders included both Carlyle and CDH who are now wanting to take Focus Media private.

One last selling shareholder amuses me. It is Neil Nanpeng Shen. He is better known as the managing partner of Sequoia Capital China - but in this context he should be known as the Chairman of the Audit Committee for Focus Media.

Is it possible that the Managing Partner of Sequoia Capital China sold personal shares in a company in which he was the chair of the audit committee and where the prospectus may have contained material non-disclosures?

I am sure there must be an alternative explanation - and I have written to Focus Media to ask them to explain the source of the Renminbi shortage disclosed above. I have received no reply. I am hoping for one soon and I will publish it when received.

The underwriting fee

The underwriting fee was about $13 million. The lead banker was Goldman Sachs. But you knew that anyway.


*All amounts rounded to the nearest million.


sdm said...

Seems like the capital raise was facilitated to enable the PE players to bail out. Perhaps the PE players were also involved in looting the firm?

But then why are they now buying the firm? Perhaps because the firm is indeed profitable and they can continue to loot it? This would suggest that the current PE offer would go through rather than fall apart.

Anonymous said...

I just looked up the terms of the deal to acquire Target Media. They bought it for 15x trailing revenue, which seems bizarre. If I had to guess, Target Media's legitimate screens (they had over 25k as of the time of the acquisition) gave Focus Media the illusion of having a larger more legitimate business, providing a foundation for them to either commit fraud or loot the company, as you've been describing well.

sdm said...

I would think that the looting theory would be as destructive for long-term shareholders as the fake profits theory: looting depends on profits and profits wouldn't be sustainable in an organization focused on looting.

If PE players have been looting the firm in cohorts with management (as your blog suggests) and want to continue doing so, then the current PE offer might go through. They and management can continue looting the firm till the firm craters. Probably far more profitable to loot the firm, especially if the firm doesn't have any competitive advantage in the long run (as you also point out). Why not loot while the going is good?

Of course, the deal would go through in this case only if the market is not getting what is going on (and the PE players know that the market isn't getting it). Maybe, just maybe, the market will get it if you keep up the great work a while longer!

Anonymous said...

Interesting to see Mr Shen's name come up.

Neil Shen of Sequoia Capital hand-picked their investment in Sinotech Energy (CTESY.PK , formerly CTE before it was delisted). This can be confirmed all over the web including Sinotech's SEC filings.

CTE was subsequently proven to be a completely fraudulent, possibly non-existent company.

Anonymous said...

Roddy Boyd discusses the Shen / Jiang relationship in his post:

Sion said...

Fear vs Greed. The ancient standoff continues...

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