Friday, November 16, 2012

Scepticism and good finance journalism: Focus Media edition

On the 13th of August 2012 Focus Media received a go-private proposal from its founder and a collection of private equity firms.

That was 94 days ago - a bit over three months.

In that time there has been very few announcements from the company.

Second quarter results were announced 22 August. All they said about the deal was as follows:
Announced Receipt of "Going Private" Proposal 
On August 13, 2012, the Company announced that its Board of Directors had received a preliminary non-binding proposal letter, dated August 12, 2012, from affiliates of The Carlyle Group , FountainVest Partners,  CITIC Capital Partners, CDH Investments and China Everbright Limited and Mr. Jason Nanchun Jiang, Chairman of the Board and Chief Executive Officer of Focus Media, and his affiliates (together, the "Consortium Members"), that proposes a "going-private" transaction (the "Transaction") for $27.00 in cash per American depositary share, or $5.40 in cash per ordinary share.  According to the proposal letter, the Consortium Members will form an acquisition company for the purpose of implementing the Transaction, and the Transaction is intended to be financed with a combination of debt and equity capital. The proposal letter states that the Consortium Members have been in discussions with Citigroup Global Markets Asia Limited, Credit Suisse AG, Singapore Branch and DBS Bank Ltd. about financing the Transaction and that these banks have provided certain of the Consortium Members with a letter dated August 11, 2012 indicating that they are highly confident of their ability to fully underwrite the debt financing of the Transaction subject to the terms and conditions set out therein.  
The Company's Board of Directors has formed a committee of independent directors (the "Independent Committee") to consider the proposed transaction. 
No decisions have been made by the Independent Committee with respect to the Company's response to the Transaction. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated.  The Company does not undertake any obligation to provide any updates with respect to this or any other transaction, except as required under applicable law.
On 23 August the company announced that the independent directors had hired advisers to help them assess any bid. To quote:
SHANGHAI, Aug. 23, 2012 /PRNewswire-Asia/ -- Focus Media Holding Limited ("Focus Media" or the "Company") (Nasdaq: FMCN) today announced that a committee of independent directors of the Company's board of directors (the "Independent Committee") has selected J.P. Morgan Securities (Asia Pacific) Limited ("J.P. Morgan") as its financial advisor and Kirkland & Ellis International LLP ("Kirkland & Ellis") as its legal counsel.

There has been no announcement since.

That is 83 days of nothing. Well not quite nothing - the company announced that they were having an AGM but did not mention the go-private proposal.

83 days is a long time for there to be no-progress on a deal which had "highly confident" funding. Surely there is some development - positive or negative - to report in that 83 days.

The Focus Media go-private deal is controversial

Even without 83 days of nothing this deal would be controversial. Muddy Waters - the research firm that exposed the fraud at Sino Forest - has been very critical of Focus Media's accounts.

I have released a many-part series exploring peculiarities in Focus Media's accounts - see Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, Part 11, Part 12, Part 13, Part 14, Part 15, Part 16, and Part 17.

My many part series did not prove that the accounts are fraudulent. It did however demonstrate some peculiar things - for instance the company purchased many seemingly unrelated businesses registered in the British Virgin Islands where all of those businesses somehow had the same address at the same lawyers office. Moreover in at least one instance they closed on the purchase of a business (by purchasing its holding company) before that holding company was even registered.

Here is the rub. Either this deal is real and just very slow or this deal is a complete show pony whereby insiders are dumping huge amounts of their shares - shares valued on a multiple of earnings from highly peculiar accounts.

In one instance the stock should go to $27 - the take-out price. In the other instance the stock should go to single digits (possibly zero) because it is a show-pony dressed up to extract monies from Western investors.

83 days since the latest news, 94 days since the announcement of the deal. Remember that.

The "Fourth Estate" has not been silent

Progress of this deal is newsworthy. This is the largest leveraged buyout deal ever in China - a watershed for the Chinese private equity business. And the media abhor a vacuum.

There have been two key news stories since the deal was announced. Each has acted to support the stock.

The first story was in Basis Point (an industry magazine) and repeated by Reuters. To quote Reuters:
Citigroup, Credit Suisse and DBS Bank are leading the three-part buyout financing, which consists of a $950 million to $1 billion term loan, a $200 million to $300 million bridge-to-bond facility and a $450 million cash bridge, Basis Point reported. 
The term loan is expected to have a five-year tenor, while the bridge financings will have six- to nine-month maturities, the report added. 
The company is looking to put together an underwriter group of six or seven banks and terms of the financing are likely to be finalised in about two to three weeks, Basis Point said.
That story was dated 11 September. They said the deal would take two to three weeks to be finalized.

It is two months now and there is no news. I think we can safely conclude that the Basis Point/Reuters report is wrong at least with respect to the timing.

More recently Prudence Ho and Isabella Steger of the Wall Street Journal said that Merrill Lynch, Deutsche Bank and UBS were going to help finance the Focus Media deal. That story was sourced to "two people familiar with the transaction". In other words anonymous sources.

Those banks were to be joining the three original banks on the deal (Credit Suisse and DBS). Again sourced to "the people".

These anonymous people were very specific: "the six banks plan to provide a total of $1.65 billion in financing, made up of a cash bridge loan, a long-term loan and a high-yield bond".

The Wall Street Journal story was dated 2 November. One of the Ho/Steger anonymous sources said "the banks will sign the formal financing documents next week at the earliest".

Needless to say that has not happened either.

Has the Wall Street Journal been played?

Good anonymous sources are part of journalism - but any journalist should ensure that they are not being played with self-interested falsehoods by these sources.

It looks awful like Basis Point were played. They published the financing was likely to be finalised in "two to three weeks" and it is now two months. The information could have been good and the timetable slipped - but as there was no follow up from Basis Point it is likely the information was flat false.

It is also possible that Ho & Steger (and the WSJ) have been played as well. It might be true that Merrills, Deutche and UBS have all joined forces to close this deal (in which case the Wall Street Journal has a story). But if not the story is a journalist's train-wreck - and should cast into doubt all the work by these fine journalists.

I started writing what I thought a journalist should do with an anonymous source when the source has been lied to them - but there are people far more versed in journalist ethics than me. But forget the ethical issue - this is for financial newspapers a business issue.

The financial press is the only part of the print media that has managed to establish pay-walls around their content. And for good reason too - reading the financial press is about making money and you can justify paying for that.

But when gullible journalists are played then acting on information in the financial press becomes a way to lose money. And what is the point in paying for that?



Anonymous said...

Totally agree that the "big quiet" suggests that things aren't proceeding as a normal PE deal would, but this

But if not the story is a journalist's train-wreck - and should cast into doubt all the work by these fine journalists.

is a bit harsh -- at least before we see how they react.

A reasonable mea culpa from a journalist who got a bit taken in can be found here:


Jacob said...


It's good to see another FMCN post from you.

I can confirm that UBS is indeed "involved" in the financing but have been unable to determine anything further. I don't think the article was mistaken. One can either read the expanded consortium as a sign of increased appetite for participation in the deal, or as increased difficulty the original banks had in finding willing investors. I honestly don't know which is more likely.

The other update in recent weeks was the news that Fountainvest successfully closed fundraising for a large fund, which would presumably participate in the Focus deal. While their cronyism has never really been in doubt, that they have the capital available at their disposal does move things along incrementally.

The one more damning point you reference was the timeline by which JPM was supposed to have conducted its review. One would ordinarily expect a fairness opinion to be a procedural matter. In fact, if the company is a fraud then $27 is indubitably a great price for shareholders, so it's hard to say what might be holding them up.

My understanding from the company was that that process was supposed to have been completed within 6-8 weeks. Even allowing for the mid-autumn break, that date is now at least 2 weeks past. Certainly that gives me some incremental comfort as a short.

Hielko said...

Quote: Here is the rub. Either this deal is real and just very slow or this deal is a complete show pony whereby insiders are dumping huge amounts of their shares - shares valued on a multiple of earnings from highly peculiar accounts.

John, I don't see any insider transaction reported. Do you think insiders could get away with selling stock without reporting it?

John Hempton said...

Universal Travel - the first Chinese stock I wrote about - eventually blew up.

No insider sales were ever reported -

I just report - you decide.


Hielko said...

I'm not that familiar with Universal Travel, but there can be a different angle besides insiders selling shares to pull off a fraud. Company selling debt and equity is the obvious path.

What I'm wondering how easy it is for insiders to sell shares without reporting it. Would seem to me that this would cause problems with the shareholder register, but not sure what the mechanics are here and how it's audited. Are there known cases where insiders sold shares and the rest of the world only found out a year later?

What do you by the way think about the parallels between HRBN and FMCN. HRBN also had a lot of big red flags, but it did go private without problems in the end. So far FMCN kinda seems to follow the same path.

Anonymous said...

There are quite a few points one might raise about this question without knowing a lot about the underlying situation.

1) You can agree to help provide contingent financing for a PE deal without actually commiting money upfront. Isnt it the same as saying you are happy to be involved if people end up getting ready to pay fees but no guarantees?

2) I dont know if the potential buyers are making progress in putting the deal together. They might well be. But I do know that the special sits boys are sitting on a ton of cash and desperately looking for places to park it that a) could be called a special sit b) yields better than t-bills.

Thats a big pool of cash to tap. Smart.

3) Does the deal get gone in the end?

I have seen dumber things happen. But it really does look like it would be a dumb thing to do. Looting looks like a given and the accounts look like a tissue of lies. But I dont really understand the mysteries of PE so who am I to say.

Moderator said...

Could it be Carlyle Group was using take-over as a bait to scutinize the book and then take a massive short positions and announce the bad news?

Anonymous said...

"John, I don't see any insider transaction reported. Do you think insiders could get away with selling stock without reporting it?"

Not to speak for John, but I don't think FMCN would be required to disclose any insider selling. As a level-3 ADR, they are exempt from many of the reporting requirements that US companies must meet. For instance:

"Accommodations for foreign companies are also in the form of exemption from
disclosure rules. Foreign companies are exempted from the proxy rule and the insider stock
trading and short-swing profit recovery provisions. Furthermore, they are allowed to disclose
executive compensation on an aggregate basis."


Jacob said...


HRBN had some red flags, but the reported figures were less of a slam dunk fraud in my opinion. They were at least possible, whereas some of FMCN's reported figures are not (e.g. movie theater revenues that exceed their own rate card). The biggest argument against HRBN was that the SAIC filings were off, but given different accounting standards, tax requirements and incentives to underreport, and the non-public nature of those documents, I'm still not sure SAIC filings tell us a whole lot of anything.

More importantly, HRBN was a fraction of the size. If FMCN gets done, it will be the largest LBO in Chinese history. Sometimes it's easy to forget they're more than just numbers - $3.5 billion is a breathtakingly large theft.

Anonymous said...

"Moderator said...
Could it be Carlyle Group was using take-over as a bait to scutinize the book and then take a massive short positions and announce the bad news?"

You don't think that would count as "material non-public info"? I think it would -- CG guys know that they don't look good in orange jumpsuits.

As a wholly irrelevant aside, it would also violate the good faith covenants in the preliminary PE agreement.

Mind you, I'm not saying that they're not concocting a nefarious scheme in which they get rich and the little guy pukes blood -- but I don't think that's the plan.


Anonymous said...

John, I think you should be a bit more kind to the journalists here. This is perhaps the largest take private deal from china, also issues of fraud are very public, number of banks involved are about 6 now, each one will be going through multiple levels of approvals and would have hired all lawyers and accountants in every jurisdiction to understand the fraud allegations. And so on. While it is always the intention to proceed quickly, getting multiple consortium buyers and multiple banks to sign up on a number of points is going to take time. I would not be worried about the time angle at all ... But can you make a bet whether the banks will underwrite or not?

Hayden said...

Agree with some of the other commentators - you may need to be a little more careful before jumping to conclusion (even if things may appear to have slowed). Citron Research was adamant that the LBO for Harbin Electric was a fraud as well and wouldn't go through, but it did (and took longer than I think they expected as well).

As an investment banker doing M&A in NY for the last 8 years, I can tell you that consortium deals take a long time to get done. And a highly confident letter means nothing - very different to a commitment letter - the bank would still need to do DD, get their own lawyers, and go through their own committee process (and each bank would need to do that).

Anonymous said...

Your indignation over media ethics is quaint. The Journal gets played all the time, and they are complicit in it. I used to warn the credit markets columnists at WSJ and DJ of this all the time (back when I myself was a source). Mostly I was met with a shrug. Reporters are more interested in getting lead stories, breaking headlines, and TV appearances. Besides, all the big financial firms hold press galas at private events at places like MoMa and the Met. That's payoff enough for playing along. What are you offering?

Anonymous said...

Could the delay relate to the leadership change in China? Perhaps the deals Focus Media has on advertising space are dependent on certain political actors remaining influential? Probably a long shot (surely it'll take even longer for the change at the top to filter down), but I do wonder at how the political transition influences decision making at firms.

NS said...


While I side with John in thinking something is shady here, I highly doubt that Carlyle would simultaneously be evaluating an acquisition of Focus and shorting the Company's stock. In nearly ever non-disclosure agreement I have seen (and as a reasonably seasoned PE investor I have seen dozens), there are strict "standstill provisions" that govern trading in a Company's securities during the diligence period (and usually for a minimum of 12-18 months thereafter).


Anonymous said...

Is anyone finding a borrow here? If so, where? I had it, and gave it up; it happens when you didn't do your own work.

DXK said...

Stock suspended, rumoured that buy-out price will be adjusted to $30.

"The world is complex. Be careful."

Anonymous said...

FMCN halted today (pending news) after rising 7% on a blog (I think) post stating (headline) that the deal closed at $30, not $27. In the post itself it sounds like the deal will close in 1-2 weeks.

Here's the blog post link

Anonymous said...

FMCN halted today (pending news) after rising 7% on a blog (I think) post stating (headline) that the deal closed at $30, not $27. In the post itself it sounds like the deal will close in 1-2 weeks.

Here's the blog post link

Anonymous said...


It seems to reason, if Mr. Hempton and Muddy Waters are correct in their assessment that Focus was exercising fraudulent activities at the detriment of long holders, that Focus would have to pay some financial penalties. Penalties which would be assessed by the SEC whenever they establish fraudulent activities. Focus would also be subject to an easy to win class action lawsuit which would further add to penalties FMCN would have to pay. Presumably, Carlyle and the other future owners would be on the hook for these legal battles and penalties, to the extent that Focus management shrugs their shoulders. If Carlyle and the debt holders financing this buyout are doing proper analysis, they are surely factoring in a payout of some form on criminal grounds to the SEC and on civil charges to shareholders.

It is also likely these fees aren't going to come in at too much of a penalty to sway the LBO investors. I believe that, not because the penalties can't add up to more than $100mm, but rather because the ROI for the equity holders will more than cover it. Furthermore, if the SEC had any hair on its back and wanted to send a fair and proper message to the China backed frauds, it would make the penalties rather stiff. I'm talking Goldman Sachs Abacus deal settlement stiff. Normally, as in the cases of Longtop and Sino-Forest, there are no American (or Canadian) entities involved which are closely related to the fraud and have deep pockets to go after and actually collect from. If Carlyle closes the acquisition, the United States courts have someone with deep pockets to go after. And Carlyle is not in the "protected" camp, the way one of the big 4 accountants are. As those following Sino-Forest know, the "protected" auditor is still going to pay penalties of at least low nine figures.

Cross border capitalism is broken, or maybe it never worked and I was duped into believing it actually was functional.

All this in my mind suggests the fair value of FMCN is at least $250mm more valuable than the current offer. Presumably this company is likely to be worth more than double its current offer in no more than 2 years and double that again 2 or 3 years thereafter. If not, the only other reason Carlyle would properly get involved in this sort of company is if the China banks (aka government) have winked at them in past and or future deals - China wink = out-sized gains. I suspect this is the case and not out of the normal for China dealings of this nature.

I am not sure where all this leads, but I am nearly certain this deal closes and Carlyle as a whole will be very happy when it closes successfully. Happy immediately and happy again over the next 3 to 8 years. This is one of the anchor investments for the Carlyle fund investing. Unless Carlyle is splitting this into more than 5 of its funds. Top notch Private equity houses do not mess around with their anchor investments. Carlyle is a top notch, extremely well managed PE shop. They have an excellent risk manager, a decent compliance officer and employment connections back to the SEC.

I guess my conclusion is, this is a stinky fraud, shorters beware.

Anonymous said...

"No Enforcement Action. No (i) action by any Governmental Authority or (ii) formal recommendation of any action by any Governmental Authority shall be pending against the Company or any Senior Officer, under either case (i) or (ii), alleging bad faith conduct of any Senior Officer with respect to the Company or its shareholders, which conduct would reasonably be expected to cause such Senior Officer to be unsuitable to serve as a director or officer of a public company listed on any one internationally recognized stock exchange under applicable rules and regulations thereof."

“the Consortium continued to (1) resist accepting risk with respect to the SEC Inquiry”

David said...

So, here we are two weeks after the shareholder vote to approve the deal and the shares are trading above $27. What gives? They say they expect to close in May, but is that going to happen?

David said...

We are now two weeks after the shareholder vote to approve this deal at $27, and the shares are trading above $27. What gives? Do we really expect this deal to close in May as the company said in the announcement of 29 April?

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.