Are AirMedia Group Transactions Still On?

by: Kok Lo

Summary

AMCN has missed two deadlines to restructure its variable interest entities, or VIEs, in order to complete the share sale deal.

The delay is possibly due to an ongoing default by the company to comply to government regulations.

Unless waived by the buyer, this failure to restructure will kill the deal.

As it stands, the risk reward ratio is around 8:1 against the shareholders.

AirMedia

When AirMedia Group (NASDAQ:AMCN) inked its 75% AM Advertising share sale with Longde Wenchuang Fund Management Co., Ltd. ("Longde Wenchuang") in June last year, it guaranteed it would complete the restructuring of its VIE entities as part of the conditions precedent by September. All this while, it has been telling shareholders that it has been "in the process" of doing the same restructuring since 2011, without success, and all of a sudden it is now promising to do it within a few months?

Sure enough, in November, it announced the completion date had been pushed back to December, and now at the end of January, it has again missed its own deadline. This is not surprising given that the company is not eligible to directly own the advertising business in the first place: It has not been operating any foreign advertising business for any of the past 3-year periods -- the qualifying criterion -- despite its claims otherwise.

With the recent crackdowns on corruptions and abuse of power in China, the days when officials can conveniently look the other way and let it slide are long gone and unless Longde Wenchuang is prepared to waive this precondition, this failure to restructure will be a deal-killer. And why should the latter agree to this, given how toxic the VIE structure can be to any owner?

If the company cannot overcome the VIE restructuring hurdle and the sale is aborted, shareholders can also kiss their privatization offer goodbye, as there is no financial justification for the management buyout if not for the potential cash proceeds from the share sale, as the company is bleeding cash every quarter. At the end of December 2014, the company had a cash balance of USD 81.1 million. At the end of September 2015, the cash balance was $127.7 million, after having received the $125.9 million initial tranche from the share sale. In other words, the continuing operations of the company had a cash deficit of $79.3 million for the 9-month period, against a reported profit of $16.2 million from the discontinued operations (i.e. the AM Advertising business). To make matters worse, the company will then have around zero cash balance left after having to refund the share purchase money to the buyer.

Where would this leave the share price then? My guess is that it may drop back down to the levels before the deal announcements, i.e. below $2. From a price of $5.55 at the time of this writing, this represents a downside of $3.55. What is the possible upside? The company has already signed the deal with the buyout group without shopping for other bidders, so the most that shareholders can realize is another $0.45 from the $6 offer price. This gives a risk/reward ratio of 3.55/.45, or almost 8:1 odds. Shareholders better be more than 90% sure that the deals will go through with this kind of odds.

Disclosure: I am/we are long AMCN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.