When China's Focus Media Holdings Ltd. landed in the cross hairs of short seller Muddy Waters, it would have been hard to believe that less than a year later, the advertising company's shares would be trading higher and the company would be the subject of China's biggest leveraged-buyout offer ever.
Now the company's largest outside shareholder is demanding an even higher price for the proposed buyout, even as the Chinese economy slows and Chinese stocks languish.
Focus Media's shares fell 39% on the November day after Carson Block, the investor behind Muddy Waters' reports on Chinese stocks, said the company had overstated the number of advertising screens it had by 50% and deliberately overpaid for acquisitions. Focus Media operates liquid-crystal displays that show ads in elevators and supermarkets across China.
The shares subsequently rallied and got another boost in August when Focus Media Chairman Jason Jiang and big private-equity firms including Carlyle Group LP offered to buy the company for $3.7 billion, which would be the biggest deal of its kind in Asia outside of Japan, according to Dealogic. The offer pushed Focus Media's shares 6% above where they stood before the first Muddy Waters report.
But Focus Media shareholder Eastspring Investments, the $20 billion asset-management arm for the U.K.'s Prudential PRU.LN, believes the price should be at least $30 a share─$3 more than the Jiang consortium's proposal. The buyout offer was a 15% premium to Focus Media's share price when it was made.
Ashish Goyal, the Singapore-based chief investment officer for Eastspring, says Focus Media generates $200 million to $250 million of cash every year, its shares trade at just eight times his estimate of earnings over the next 12 months and the company has $500 million in cash and no debt.
'It was a very cheap stock, and we still think that it's a cheap stock,' Mr. Goyal says.
To be sure, outside shareholders in nearly every management-led buyout complain that the price is too low. But Eastspring has been a loyal, longtime investor in Focus Media. Eastspring's 8% stake makes it Focus Media's third-largest shareholder, after Mr. Jiang and Shanghai conglomerate Fosun International Ltd. Eastspring had sold most of its shares before the Muddy Waters reports because Eastspring believed they were too expensive.
After the stock tumbled, Mr. Goyal hired investigators to count the number of Focus Media screens and look into the company more broadly. After a month, Eastspring bought more than six million shares at less than where they stood before the Muddy Waters reports.
'We think Muddy Waters exaggerated some of the issues,' Mr. Goyal says.
Shanghai-based Focus Media twice has denied Muddy Waters' attacks and declined to comment for this article.
A Muddy Waters spokesman said the firm stands behind its statements.
The buyout has another hurdle. To fund the acquisition, Mr. Jiang and his partners─affiliates of Carlyle and Chinese private-equity firms FountainVest Partners, CITIC Capital Partners, CDH Investments and China Everbright Ltd. ─likely would need to borrow between $1.5 billion and $1.6 billion.
Citigroup Inc,Credit Suisse Group AG and Singapore bank DBS Bank Ltd. have been lined up by the Jiang consortium to arrange financing, according to people familiar with the matter.
Because the buyout offer hasn't received the backing of Focus Media's board, according to the people, the loan hasn't been underwritten by the banks yet. But they provided Focus Media with a letter saying they were 'highly confident' they could underwrite the deal, according to a statement from the company. The banks are getting approval from their internal credit teams to underwrite the debt based on Focus Media's ability to generate cash and its predominance in advertising through LCD screens, according to one of the people familiar with the matter.
By underwriting financing, the banks would be saying they would cover the loan if they couldn't syndicate it, that is, sell portions of the loan to share the risk.
The question is how much enthusiasm there is for a loan of at least $1.5 billion when Western banks are wary of taking on risk, in particular for a Chinese company targeted by a short seller. Some bankers say there are plenty of capital-rich Asian banks willing to buy part of a loan for a market-leading company with strong cash flow, however.
The loan won't be issued until Focus Media's board approves the deal, which will likely take two months, the people familiar with the matter say.
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