There's Still Hope for Focus Media After Sina Acquisition

Like many others I couldn’t resist having high expectations for Focus Media Holding Limited (FMCN). For the first two and half years after its IPO I watched its stock price soar, but over the past year I also witnessed its value decline 81%. Is there hope for the ailing Chinese media giant? As of this week, Sina Corporation (SINA) assumed control over Focus Media’s cornerstone outdoor advertising services, which are comprised primarily of strategically placed posters and LCD screens. This leaves Focus Media with just its online advertising, movie theater and traditional billboard advertising services. However, I am still optimistic that there is hope for Focus Media. This is why…

Time To Refocus

Over the course of 18 months Focus Media went through four mergers with all four mergers in a different area of advertising. The company’s rush to grow into a media giant had it expanding in all different directions. It was getting bigger, but it was growing without any real focus. By getting rid of its outdoor advertising services and receiving over one billion dollars in shares from Sina, Focus Media has an opportunity to develop its digital advertising where I see more long-term growth as opposed to the outdoor advertising services that have their drawbacks.

According to a February 2008 CR Nielsen report, Chinese consumers make 60% of their purchase decisions in store. Theoretically this would imply that Focus Media’s in store screens should be highly effective; however McKinsey’s recent study on the Chinese consumer suggests that point of purchase salespeople are the true beneficiaries of this trend.

Word of mouth is king here in China. A stranger who is paid to sell specific products is more influential over consumers’ purchasing decisions than small video screens scattered throughout the store. Moreover, any popular shopping destination that has these screens is typically so overflowing with patrons that people are more concerned with dealing with the chaos instead of watching the advertisements. However, the point of sale representative is successful because he or she can physically draw customers’ attention away from the chaos and give their personal endorsement to the product.

I do admit, the framed advertising and video screen advertising is a great fit for China’s urban office buildings and apartment complexes where people often wait upwards of ten minutes at a time for elevators. Over the long-term though there are only so many buildings that can accommodate this form of advertising and limited types of content that can be produced.

If Focus Media successfully reinvents itself into an online advertising powerhouse, then it will not be limited by the amount of urban real estate and instead will be able to tap into the market of now 290 million Chinese netizens (up 40 million since June 2008). Despite the economic crisis, online advertising in China continues to push on. With the number of Internet users still at relatively low levels of penetration and the infinite ways for advertisers to creatively leverage ever-changing online advertising tools to engage potential customers, there is more room for long-term growth in the online space for Focus Media than in the real world. For these reasons I am not giving up on Focus Media just yet.

Comments

[paul trades...:]

Joel, they don't get a $billion. It is a stock deal. Their internet business is also on the block so FMCN will not exist in 6 months other than as FocusSina (or something like that). So, don't keep your hopes up because they've already thrown in the towel.

2008 Dec 24 08:09 AM

[northvalley:]

You apparently have not been to China and are making these assumptions out of your apartment/house some 8000 miles away from China. First of all, FMCN does not get 1 billion dollars cash from Sina, it get 47 million lousy shares of Sina. There is a big difference here. Second, you know how much Chinese citizen got bombarded with all sorts of ads? You cannot even imagine. The ads on are in subways, on the train window, on your hand rail, on top of men's urinals. The point is the effectiveness of these ads are diminishing! Third, you want to know the real reason of this transaction? Is it because Jason Jiang wants to get out. He does not want to run this business anymore. He is 35 and has made enough money. He does not want to deal with the collapse of the ad market and reinvent his company. The notion that FMCN will reinvent itself into an online advertising powerhouse is laughable! Sina is much bigger online vs. FMCN. There are a few other online players like Sina. FMCN does not have the success gene in online, it started off from off-line, mind you!

2008 Dec 24 08:18 AM

[Monkey Man:]

Agree with Paul Trades and Northvalley. I would get out of Focus. Their only hope now is be able to find a buyer and rumors have certainly been floating around. As a standalone business not very interesting given lack of scale, small/immature online advertising market in China and shrinking ad budgets.

2008 Dec 24 09:31 AM

[Zachary Sch...:]

The interesting thing is how the transaction with SINA is set up. Shareholders of FMCN should receive 36.5 shares of SINA for every share of FMCN they own. Looking at the closing price of the two stocks from Tuesday afternoon, the market is essentially valuing the residual FMCN at just $1.20 per share. That could end up being a really good deal. One could buy 1,000 shares of FMCN right now, short 365 shares of SINA, and create the new FMCN stock at $1.20.

I wrote about the transaction in my blog here zachstocks.com/2008/12.../

Not trying to spam or anything, I just think its germane to the subject.

Happy Holidays everyone!
Zach
zachstocks.com

2008 Dec 24 01:43 PM

[EzF-T:]

Stiil use best strategy on it, good analyze, will earn you more equity

2008 Dec 26 02:04 AM

[kagame:]

FMCN also keep a big chunk of their cash, something like 100 million. There is no way the stock should trade below $10. The Sina shares alone, are as of market close today, going to be worth 7.6 a share. If Sina gets a pop back to $23 from their conference call, which occurs the 27th, it could be a dollar more a share for FMCN's valuation.

These are FREE new FMCN shares post merger.

My strategy:

Currently, sell March 20 7.5 FMCN puts.
Currently, sell March 20 7.5 FMCN calls.

Approaching CC:

*Close short put position.
*Increase short call position!!!; as the value of FMCN shares will plummet post merger/SINA share distribution. Is there anything I'm missing here? Seems like a slam dunk and the KEY point missed by all SeekingAlpha analysts. Why does no one recommend shorting FMCN? It doesnt obligate you to also be short SINA shares post merger, does it?
*Long FMCN stock for SINA shares, cover those calls we wrote.

On CC:
Short Sina shares if over $21 in price, assuming FMCN still at $7.5. Simple equation to find fair value for Sina shares based on FMCN shares, .365 SINA for each FMCN.

Long Term:
Evaulate new FMCN shares for true value, probably close partial position and freeroll on possible comeback.

Any questions on my option strategy? Clarification on the Short FMCN = Short SINA post merger issue would be appreciated. :)

Feb 25 06:44 PM

[kagame:]

So apparently the merger shares would count against options.

So the simply play here is long FMCN, write calls. I would short SINA but its rallying harder than FMCN, there is no correlation there right now.

Why is the marker so irrational about this? Theres plenty of info out there that should allow people/funds/hedgies to buy on this misvaluation.

Mar 20 06:28 PM

[Violent Cap...:]

kagame, if you employ merger arbitrage it won't matter that sina shares are rallying harder than FMCN

FMCN can go to 0, you lock in the value of SINA shares and you'll still have a net 50% profit on your original long FMCN stock.

you can also lock in further gains on your FMCN stock by buying some puts (I suggest Oct 2009 strike 5)

all of it is on my blog violentcapitalist.com

just sit back and relax! your only risk is the transaction won't go through


On Mar 20 06:28 PM kagame wrote:

> So apparently the merger shares would count against options.
>
> So the simply play here is long FMCN, write calls. I would short
> SINA but its rallying harder than FMCN, there is no correlation there
> right now.
>
> Why is the marker so irrational about this? Theres plenty of info
> out there that should allow people/funds/hedgies to buy on this misvaluation.

Apr 16 12:17 AM