Focus Media (FMCN) has approved a buyout offer to go private at $27.50 per ADR share (SEC filing) by a consortium of Asian PE funds - including Carlyle (CG). A lot has been written about the possibilities of fraud at Focus Media - see Muddy Waters here. SA contributor Peter Fuhrman wrote an article on why the deal might not be a smart one for the PE firms. Paolo Gorgo's article is also excellent - particularly the links to Bronte Capital articles.
But I don't care about any of that. I'm not going to be in on the deal so I don't care if they are being smart or stupid. I don't care if Focus Media's acquisitions were fraudulent. What I care about is the 7% spread (it was 10% before 8 March) against the buyout price - so will it close or not?
Here seem to be the relevant considerations. You'll note a total lack of financial statements and projections; as stated I'm looking only at whether the buyout will close with no view into the appropriateness of the price (for buyer or seller) -
- The PE firms are not concerned about allegations of prior fraud. They did their homework and remain committed in spite of rumors and SEC investigation.
- Focus Media has been under SEC investigation for nearly a year. While the PE firms aren't concerned, the investigation could easily delay closing.
- One pension firm has sued Focus Media over the sale price and provisions which prevent competing bids. An injection could, if upheld, scuttle the deal - though this seems unlikely. However, the outstanding legal action has a good chance of contributing to delays.
- The merger must complete by 19 June, 2013 - with an option to extend to October.
- There's one report that the consortium doesn't have enough loan funding "Focus Media received commitments in syndication for 23% of the loan required to finance its planned leveraged buyout, according to China Daily" (here referencing ChinaDaily here). This directly contradicts the SC 13E3 filing which states that a number of Singapore and Hong Kong banks have committed to the loan. I suspect the report is a misinterpretation - that the banks have only syndicated out 23% of the original, committed, loan.
- The consortium controls at least 36% of the votes. Due to Cayman Islands regulations, they need ~47% of the remaining shares to vote in favor.
- Focus filed its original 13E3 on 18 Jan 2013. An amendment came on 22 February. And on 8 March came yet another. The 8 March filing led to a 2.5% increase in share price.
I sense that the SEC investigation and suit are the main remaining obstacles. If the SEC finds fraud, it is more likely to settle for a penalty sum which is unlikely to prevent the merger. If the SEC held an executive responsible, forcing his resignation, that would scuttle the deal - but when has the SEC pursued that course? The SEC investigation seems more like a possible delay than deal breaker. The pension firm's suit strikes me as a distraction. I think the vote will go through - there has been no high profile resistance. With the significant efforts to get the proxy filings right, I suspect the company is ready to go on closing the deal.