AVCJ Awards 2016: Exit of the Year - IPO: Focus Media

Following a handful of accounting scandals, it became open season on US-listed Chinese companies in 2011 as short-sellers probed balance sheets for weaknesses. Their findings were shared with the world, even if the discrepancies were more perceived than real. Focus Media was no exception, repeatedly coming under attack from Muddy Waters, which accused it of overstating assets and overpaying for acquisitions.

The company denied the allegations but its shares came under pressure. In May 2013, eight years after debuting on NASDAQ, Focus Media made its exit: CEO Jason Jiang, and a group of investors - including The Carlyle Group, FountainVest Partners, CITIC Capital Partners, China Everbright and Primavera Capital - took the company private in a deal worth $3.7 billion.

Carlyle was an investor in Focus Media prior to its 2005 IPO, and despite making a full exit, the GP maintained a close relationship with Jiang. When an opportunity presented itself to back the company once again, the Asia buyout team was happy to participate. Others followed suit.

"Almost every private equity firm looking at take-private opportunities would have reviewed Focus Media because it had strong cash flow. The industry itself also had strong growth prospects in China due to rising domestic consumption," says Henry Tao, a managing director in China Everbright's capital investment and financing department.

Focus Media operates an advertising network in various urban locations, relying on audiovisual displays in commercial office buildings as well as large retail chain stores. Revenue came to $792.6 million in 2011, up 54% year-on-year, while net income rose marginally to $200.9 million.

Fosun International, the largest shareholder after Jiang, agreed to join the consortium by rolling over its stake into the acquisition vehicle, and $1.5 billion in aggregate debt financing was secured for the deal - the largest leveraged buyout in China at that time. A dividend recap was done within six months of the deal closing, such are the company's cash generative powers.

Private to public

The plan was to re-list the business in Hong Kong, but this switched to a reverse merger in Shenzhen because Chinese regulators were keen to see overseas-listed companies come home. The deal's certainty outweighed its legal and administrative complexities.

"It was about a one-year process, from meeting the regulator to completing the reverse merger in December 2015. One of the difficulties was finding a suitable company to reverse into - there is always a reason why these companies are willing to be sold, maybe their core business has hit a bump or there are other issues," says Frank Tang, CEO of FountainVest.

Last May it was announced that Shenzhen-listed Jiangsu Hongda New Material would acquire Focus Media for RMB45.7 billion ($7.37 billion). One month earlier, a group of shareholders - including Carlyle, FountainVest, Fosun, CITIC, China Everbright and Primavera - made partial exits in a deal that valued the business at RMB45 billion as an effort to remove the red chip offshore listing structure and become an onshore-controlled entity.

However, the resignation of Hongda's chairman after a regulatory probe stalled the re-listing. It was replaced as the shell by Hedy Holdings, another Shenzhen-listed company, on identical terms. Hedy exchanged assets worth RMB880 million with Focus Media and paid RMB4.93 billion in cash to Focus Media China Holdings (FMCH), an offshore shareholding entity. It also issued 3.8 billion shares in exchange for Focus Media stock - excluding FMCH - for a total consideration of RMB39.7 billion.

On completion of the re-listing, China Everbright, which committed $50 million to the privatization, held a 1.35% stake in Focus Media. CITIC Capital had 9.13%, Carlyle and FountainVest each had 7.85%, while Fosun and Primavera owned 8.09% and 0.67%, respectively. As of early December, the company's market capitalization was RMB140 billion. Revenue increased 15% year-on-year to RMB7.5 billion in 2015, with net profit jumping from RMB2.4 billion to RMB3.4 billion.

Upside potential

Tang observes that exits "take a lot of hard work and occasionally some good luck," and the Focus Media liquidity event appears to have been well-timed. Since the end of last year, China is said to have suspended listings by companies that were taken private in the US. This reflects concerns about multiples arbitrage plays - driven by desire to flip a business into a listing as soon as possible, leveraging the valuation gap between onshore and offshore markets - that have caused speculation on shell companies and general price volatility.

Participants in the Focus Media deal stress that they were attracted by the company's fundamentals, not an arbitrage opportunity. And in two cases, relations between the investors and the portfolio company will continue long after the lock-up period on the shares expires.

FountainVest and China Everbright are working with Focus Media on separate industry-focused funds targeting the broad consumer space, from sport and entertainment to internet finance. The aim is to scale up exposure throughout the consumer value chain, taking advantage of the shift in Focus Media's customer base from carmakers and liquor manufacturers to e-commerce and media companies.

"Even before the listing, investors suggested that Focus Media adopt a multiple business expansion plan," says Tao. "One approach is to add more internet flavors to its core business. For example, as more e-commerce companies appear on its advertising platform, Focus Media can identify trends and source the best deals in these areas."

Pictured: Frank Tang of FountainVest Partners

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• Topics
• Greater China
• IPO
• Media
• China
• Exit
• Fountainvest Partners
• The Carlyle Group
• China Everbright
• CITIC Capital
• Primavera
• Fosun Group
• AVCJ Awards