On the 8th of this month, AirMedia Group Inc. (NASDAQ:AMCN) (the company) made a one paragraph announcement on the completion of the sale of 75% of AM Advertising and received in full the cash proceeds of RMB 2.1 billion. In order to do that, they have managed to somehow comply with one of the condition precedent of the sale requiring the restructuring of the onshore VIE units to be directly company owned, in spite of the fact that they lacked the required overseas advertising business track record.
The logical next step would be for the company to proceed with the privatization of the outside ADS at $6 each as announced previously, now that the cash is already in the kitty, which is essentially what all the outside shareholders are waiting for. But there is another condition to be met before the sale can be final: achieving an audited net profit of RMB 150 million for 2015 for the 75% sold business, or RMB 200 million for the whole (USD 32 million at 1 RMB = 0.16 USD). The 2015 results are still out, but for the first 3 quarters of the year, the total was only USD 16.2 million, so for the final quarter, the business will need to earn another $15.8 million, almost 3 times that of the average for the 3 previous quarters. So this is not yet a done deal.
One aspect of the privatization offer that has not been picked up by the investing public is the security to be provided to the financier of the deal, China Merchants Bank New York Branch, via their letter of offer dated September 29, 2015. Besides the standard security package for such an exercise, there is a condition precedent requiring the company and or its units to pledge on shore (i.e., with the Bank's Beijing Branch) an amount in RMB equivalent to no less than 108% of the funding to be provided by the New York Branch to AirMedia Merger Co. Ltd (Merger Co), the proposed privatization vehicle by the management buyout group. This pledge needs to be in place before the funding can be drawn upon.
Until the transaction is completed, Merger Co is a separate and distinct legal entity from the company, other than having the management as common shareholders. The company is incorporated in Cayman Islands, a British territory following in general the British legal system, as modified by local statues. One important principle in British company laws is the prohibition against a company financing, directly or indirectly, the purchase of its own shares. The most common type of assistance is a financial guarantee for a loan and/or third party security to allow a borrower to borrow money to buy shares which is routinely given (to the extent legally possible) after a leveraged buyout in support of the new owner's acquisition debt. It makes a world of difference whether the assistance is provided before or after the completion of the buyout.
In the case of the former, management is pledging assets of the company, which belong to all shareholders, in support of their private buyout offer. This will cause a de facto diminution of the company's value in the hands of the other shareholders who are not part of the buyout group Merger Co. Would shareholders allow a CEO of a public company to pledge company assets to a bank in support of his personal loan? This can constitute criminal breach of trust and breach of fiduciary duty.
If the assistance is done after the transaction, no problem then, as there are no more outside shareholders to contend with and management can do anything they like with the then private company assets. So in order for the buyout to proceed, the loan financing package as it stands needs to be modified such that the onshore cash pledge is effected only after the completion of the buyout, not before. Shareholders should realize that by accepting the loan offer to Merger Co, management has acted against their interest, and possibly illegally too.
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.