tag:blogger.com,1999:blog-4815867514277794362.post546156124408078532..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Focus Media: Three interpretations - which one is rightJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-4815867514277794362.post-62097141605850770052012-11-06T02:09:09.795+11:002012-11-06T02:09:09.795+11:00I know it's a bit late to comment on this post...I know it's a bit late to comment on this post but if it is scenario (c) why is Mr Jiang risking going through this PE due diligence process, why not just try and repeat the trick with some more "bad" acquisitions?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1333068069838459222012-09-19T12:55:46.317+10:002012-09-19T12:55:46.317+10:00Isn't there another possibility similar to (c)...Isn't there another possibility similar to (c)? Suppose rather than making fake losses to hide fake profits, they are making losses to generate (fake) profits, by paying back money to their main clients. In this model, clients willingly overpay for advertising (resulting in the high revenue), knowing they will get the money back in another way.<br /><br />This may depend on how advertisements are placed on these screens. Suppose a few agencies place most of the ads for major companies, overpay for the ads and then in turn overcharge those companies, and then later get a bonus back. Just a guess that if you look at where the ads originate, you might find something. Or try to place an ad for Bronte Capital on one of those screens, and see how much it costs you.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49060183123773932382012-09-18T12:41:48.813+10:002012-09-18T12:41:48.813+10:00John, Citi, CS and DBs are syndicating the loan fo...John, Citi, CS and DBs are syndicating the loan for the purchase. I am guessing you are an equity client with the first two. I would think the lending desks might be willing to exchange notes with you (public data only) as they must have had the issues you raised addressed at the commitment committee. <br /><br />RichardAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-78902937686539706552012-09-18T11:12:33.829+10:002012-09-18T11:12:33.829+10:00While HRBN is a case of a probable China fraud act...While HRBN is a case of a probable China fraud actually going private, I know of another China fraud were the going-private transactions was announced but never happened, and there are probably a few more out there.<br /><br />Maybe the favor Carlyle is providing isn't the costly one of actually buying a worthless Focus Media, but rather of pretending to be interested while insiders sell to dumb money arb funds.<br /><br />Normally these insider sales need to be disclosed, but what is the SEC going to do about China nationals dumping stock without reporting? Absolutely nothing.GZnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-46868638151253467622012-09-18T11:06:22.738+10:002012-09-18T11:06:22.738+10:00The explanation that Carlyle is willing to lose mo...The explanation that Carlyle is willing to lose money in return for future favors assumes there are a bunch of profitable PE deals in China for foreign money with the right connections, and that these people will actually return the favor and follow through and provide these to Carlyle.<br /><br />I don't think that's the case at all, and foreign investors in China continously get burned. Can someone cite to a large China PE fund that has beat SPY after expenses over the past 5 years? I'd be impressed with even one example. <br /><br />The lack of the rule of law in China means that economic profits on long-term investment is very rare. We deal with the principle-agent problem in the West first with criminal laws, and if you can't get satisfaction there with civil lawsuits.<br /><br />The other problem with China is that it is completely awash in financial capital. It has huge trade surpluses creating domestic dollar holdings plus huge domestic savings. The idea that there are a bunch of opportunities for foreign dollars to make money in China thus makes no sense. The only foreign capital China needs are raw materials and a bit of specialty Western labor and equipment, not purely financial capital like Carlyle's money.<br /><br />Two better arguments that the deal will close are that (1) Carlyle is just dumb money like Greenberg and Paulson (2) the Carlyle people involved just need to deploy assets in China and are unconcerned with returns, or with the failure of their smaller specialty funds and the risk it will tarnish their franchise with dumb money in the future.GZnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-83180628298452956872012-09-18T04:52:41.904+10:002012-09-18T04:52:41.904+10:00Hi John,
What if its mostly C, and the deal goes ...Hi John,<br /><br />What if its mostly C, and the deal goes through? If you look at the actors, this seems likely. PE gets a business that isn't as good as it says, but still profitable, and, meanwhile, becomes a huge creditor of favors.<br /><br />Thats not concrete, but look at the alternative: why would the PEs get involved unless all the bad signs looked to be VERY PROBABLY overcome-able, or a cost somehow worth the while?<br /><br />Seems like more harm is had than gain by entering this due diligence period simply to figure out if the revenues are real or not...<br /><br />You beautifully run through the rational factors. What about the (rationally) irrational ones? C is true, but they buy anyway?<br /><br />Well, yes, you have now thought of that. Hence the lovely post-script ;) I see why you are worried!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-43718512711192963892012-09-18T00:24:51.766+10:002012-09-18T00:24:51.766+10:00I am worried about what the first two commenters w...I am worried about what the first two commenters wrote. They may have looted the company or were faking cash flows but you have to give some weight to the possibility that they will buy it out anyway to cover it up. Seems like china is like the wild west - lots of bribes, favors, whatever it takes to get the good deals.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-17563198605255879662012-09-17T22:26:40.401+10:002012-09-17T22:26:40.401+10:00If this deal closes and is c, then it can probably...If this deal closes and is c, then it can probably fairly described as a way to gain favours or pay them back. But I'm not sure defrauded investors would sue Carlyle and co - nor would regulators. The most likely is the DOJ via the foreign corrupt practice act. They've done a lot of overtime over the last few years, targeting all sorts of corrupt practices, including rather benign run of the mill payments for O&G in Africa. Anyway, that may take years to come about - or it may just never see the light of day because a quick look at Carlyle tells you these guys are connected politically like no one else. I guess having all those guys on board may help make things disappear when needed.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-71419918528344067492012-09-17T21:19:17.294+10:002012-09-17T21:19:17.294+10:00Hi John
I agree 3 looks most likely but what I do...Hi John<br /><br />I agree 3 looks most likely but what I dont get is why would management push for buyout knowing that extensive due diligence is on the way. As they have not yet announced fake losses post 2009 then they will have to show the fake cash to the doers of due diligence. Short of forging bank statements (as Longtop financial did) how do they achieve this? <br />Lucianluciannoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-11172414076086910242012-09-17T19:42:06.806+10:002012-09-17T19:42:06.806+10:00Why would cash need to be paid to the Richmont ban...Why would cash need to be paid to the Richmont bank if it's being looted anyway? <br /><br />I don't think a registered company and bank account need to exist if the company is being looted - just pay the cash to the bank account of whoever is doing the looting, cover it up in the accounts with a fake business purchase, say oops a couple of months later when you realise you forgot to register the fake company and register it then anyway...<br /><br />I'm still persuaded by interpretation c), but I don't think this is evidence for it.AmirSnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-80774317466617964152012-09-17T16:31:09.600+10:002012-09-17T16:31:09.600+10:00Isn't the best way to value this to put percen...Isn't the best way to value this to put percentages on looting vs fraud, and multiply through to find the expected value?<br /><br />Value of fraud x probability of fraud + value of looting x probability of looting. <br /><br />Let's say $2 for fraud, and obviously $27 for all other outcomes.<br /><br />If we say there's a 30% chance it's a fraud, the expected value is:<br /><br />0.3 x 2 + 0.7 x 27 = $19.50. Current price is $24.30. So it looks about 25% overvalued.<br /><br />Substitute your own probabilities in there. What's your best guess?Philhttps://www.blogger.com/profile/15147281546842041442noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44541065816767063432012-09-17T13:50:35.876+10:002012-09-17T13:50:35.876+10:00i don't think there are any china state bank i...i don't think there are any china state bank involvec in this deal, ar there?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-87333827527129086462012-09-17T13:21:22.558+10:002012-09-17T13:21:22.558+10:00I think you should explore (b) a bit more. What if...I think you should explore (b) a bit more. What if the rabbit hole goes much deeper?<br /><br />The deal is being advanced by Carlyle, a China PE fund, and a couple of state-owned Chinese banks. All of these participants are repeat players. Say this transaction is an elaborate deal to funnel bribes to various mandarins, all of whom are presumably powerful (i.e. worth bribing). Assuming that the transaction gets them future, profitable deals from the people they have bribed and that the Chinese banks are willing to eat some amount losses from lending to connected businesses, is it really such a sure thing that Carlyle or Everbright walks from this deal even if it's dirty? Is an LP really going to sue Carlyle for losing on one deal that helps them bag 5 winners (or at all, for that matter - the world of PE is not a large one, and investors who demonstrate litigiousness might have difficulty finding other funds that want their investment, to say nothing of the very tall odds in a case where scienter must be proved based on what is very likely to be a scant amount of documentary evidence, all of which will be located in China)?<br /><br />HALAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29419166228788086932012-09-17T12:33:02.348+10:002012-09-17T12:33:02.348+10:00Hi John,
What makes you think that a HRBN situati...Hi John,<br /><br />What makes you think that a HRBN situation can't repeat? i.e. all the evidence points to a dirty business but then the transaction goes through anyway and all the shorts get burnt. <br /><br />I don't understand the mechanics but for example say the Chinese govt guarantees the loans to the PE buyers? Kind of like a developer rental guarantee when you buy an apartment off the plan... Everyone gets paid and the losses disappear into the central bank balance sheet. <br /><br />I will never be surprised at the extent of corruption at all levels in China...<br /><br />Cheers,<br />ChinpAnonymousnoreply@blogger.com