AirMedia Group - Going Private Deal Hits A Road Block

| About: AirMedia Group (AMCN)

Summary

Previous sale of advertising business is starting to unravel.

Buyers are seeking specific performance of certain obligations by the Company and the Chairman as per the sale agreement.

This will add to the uncertainty of the long delayed buyout offer and impact the share price.

AirMedia Group Inc., (NASDAQ:AMCN) a Nasdaq listed Chinese outdoor media company with an outstanding $6 per ADS going private offer, announced on the 2nd of this month that it was named, along with certain subsidiaries of the company and its Chairman, Mr. Guo, as respondents in an arbitration proceeding at the China International Economic and Trade Arbitration Commission brought by Longde Wenchuang Fund Management Co. Ltd. (Longde), the buyers of the 75% shares in its former subsidiary AM Advertising. The transaction was completed earlier this year with full payments received.

The buyers are now seeking specific performance of certain obligations under the transaction documents, which include, among other things, (1) the pledge by the subsidiary and Mr. Guo of their respective equity interests in AM Advertising to the buyers as security for their obligations under the transaction documents, (2) the use of best efforts by the Respondents to cooperate with the buyers to procure the listing of AM Advertising in China and (3) the performance by the Company and Mr. Guo of their respective non-compete obligations to refrain from holding, operating, or otherwise participating in any business that is the same or substantially the same as that of AM Advertising.

While AMCN has given no indications of how the dispute came about, readers who have been following the continuing drama and intrigue of AMCN and its erstwhile business partners should have a pretty good idea already. According to my analysis, the AM Advertising sale was part of a scheme by Longde and Chairman Guo to privatize AMCN and re-list the profitable parts of the business back in the then booming Chinese stock market in order to capture the much higher valuation that is likely to be achieved there.

However, things started to unravel when Chairman Guo's buyout exercise was delayed for reasons best known to him and Longde, worried that time is not on their side in view of the deteriorating Chinese stock markets, unilaterally negotiated a backdoor listing deal with Shanghai listed Shanghai Golden Bridge Info Tech Co. Ltd. (Jinqiao) for the advertising business, without waiting for the former and doing it together, as originally agreed.

Feeling betrayed and left out in the cold, Chairman Guo threatened to exercise AMCN's shareholders' rights of first refusal to block the Jinqiao deal, which was subsequently called off by Jinqiao, much to the chagrin of Longde. At first, I would have thought that both parties would then quietly try to work out a win-win compromise and patch things up, but with this arbitration notice, things must have escalated to the next level and shareholders may be unwittingly caught in the middle if the buyout offer is now in jeopardy.

The first thing Longde is seeking is the pledging of the remaining AM Advertising shares still held by AMCN and Chairman Guo personally. This may be part of the security for the profits guarantee given by AMCN to the buyers. If this is the case, Longde may then be able to seize these shares as compensation for the profit shortfalls that had or is likely to be incurred.

Without these shares, there would be nothing of value left in AMCN for Chairman Guo to do his buyout, as the rest of the businesses are losing concerns at the moment and most of the cash from the earlier share sale would have been earmarked to pay for the buyout itself. The immediate casualty of such a ruling would be the share price, as it can no longer count on the promised buyout for support.

The second specific performance Longde is seeking is to restrain AMCN and Chairman Guo from interfering with any future backdoor listing deal that Longde may be making, so that there won't be a repeat of the Jinqiao fiasco. This will neutralize Chairman Guo's preemptive rights as a potential stumbling block.

The third remedy is the enforcement of the non-compete clause in the sale agreement, as Longde envisaged that because of soured relationship, AMCN may try to revive the discontinued advertising business in competition with Longde.

Even though arbitration proceedings are usually less drawn out because the findings are final and binding on both parties without the right to appeal, the uncertainty of the possible outcomes will definitely have an effect on whether Chairman Guo would still proceed with the buyout or wait and see. My bet is towards the latter, as a wrong decision could be ruinous.

Shareholders are now left in a lurch not knowing what to expect next and what are the latest quarterly financial results? In addition, there has been minimal disclosures from the company, as AMCN is not required to fully inform shareholders as per the exemption from the SEC Fair Disclosure regulations. So as always, caveat emptor.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.