Focus Media's Acquisition of Target Media Raises Questions; Competition Upcoming? (FMCN)

Focus Media (ticker: FMCN) strengthened its position in China's out-of-home advertising market using flat-panel displays this weekend by acquiring leading competitor Target Media for $325 million. After the completion of the merger, Focus Media will operate a nationwide commercial location advertising network of over 60,000 displays in more than 30,000 commercial locations in about 75 cities in China.

From Focus Media's press release:

Target Media is the second largest out-of-home flat-panel display advertising network operator in China in terms of number of commercial locations and number of flat-panel displays installed in its network. Target Media commercially launched its out-of-home flat panel display advertising operations in July 2003, and owned and operated a national network of 25,106 flat-panel displays in 16,652 locations in 43 cities in China as of September 30, 2005. For the nine months ended September 30, 2005, Target Media achieved revenue of US$21.6 million and net income of US$4.0 million.

The acquisition is expected to generate cost synergies and result in an improved cost structure for the combined entities. By combining both companies' resources, Focus Media will significantly increase the size of its commercial location network and offer advertisers the opportunity to deliver advertisements to larger and more segmented audiences. Therefore, Focus Media believes its network will become more appealing to its advertising clients.

"This is a decisive move that accelerates our strategy and positions us to offer even greater value to our advertisers," said Jason Jiang, Chairman and Chief Executive Officer of Focus Media. "In addition to the strategic benefits of combining two highly complementary organizations and product families, we believe we can create additional shareholder value through cost structure improvements and access to new growth opportunities. The increased coverage of our network will make it possible for us to achieve further media segmentation based on location categories, and provide advertisers with more targeted advertising channels so as to further improve their return on advertising investment. Together with our recent acquisition of Framedia's in-elevator poster frame network, Focus Media has built a strong foundation to realize its long-term objective of establishing China's largest multi-media platform out-of-home advertising company covering the daily activities of urban consumers."

The acquisition has been approved by both boards of directors. Under the terms of the agreement, Focus Media will acquire 100% of the equity interest in Target Media for US$94 million in cash and US$231 million in the form of Focus Media ordinary shares (priced at US$30.00 per ADS, each of which represents 10 Focus Media ordinary shares), equal to 77 million Focus Media ordinary shares. All of the Focus Media ordinary shares to be delivered under the agreement will be in the form of newly issued shares. Subject to regulatory requirements and customary closing conditions, the transaction is expected to close in the first quarter of 2006. David Yu, Chairman and Chief Executive Officer of Target Media, will join Focus Media's board as Co- Chairman of Focus Media, upon closing.

From an article in today's Wall Street Journal (sub req):

In China advertisers increasingly blast messages via display monitors, with the out-of-home sector accounting for as much as one-sixth of advertising spending, by some estimates. Flat screens are common in elevators and lobbies of luxury apartments and offices, in grocery and department-store aisles, and in subways, buses and taxis. At Shanghai's waterfront, screens stretching tens of stories high adorn major buildings.

Since Focus Media listed on Nasdaq in July, its shares have soared on its potential to reach China's middle-class consumers. While the regulatory environment remains uncertain and competition is stiff, Focus Media is one of the most valuable listed Chinese media properties.

Focus Media made mention of Target Media in its IPO prospectus (dated July 13, 2005):

Competition

We compete primarily with other advertising companies that operate out-of-home television advertising networks in China, such as Target Media. We compete for advertising clients primarily on the basis of network size and coverage, location, price, the range of services that we offer and our brand name. We also compete with out-of-home television network operators to gain access to the most desirable locations in economically developed cities in China. We also may compete against individual buildings, hotels, restaurants and other commercial locations that decide to install and operate their own flat-panel television screens on a small scale. We also compete for overall advertising spending with other alternative advertising media companies, such as Internet, street furniture, billboard and public transport advertising companies, and with traditional advertising media, such as newspapers, television, magazines and radio.

In the future, we may also face competition from new entrants into the out-of-home television advertising network sector. Our sector is characterized by relatively low fixed costs. In addition, as is consistent with industry practice, we do not have exclusive arrangements with our advertising clients. These two factors present potential entrants to our sector of the advertising industry with relatively low entry barriers.

In addition, wholly foreign owned advertising companies will be allowed to be established as of December 10, 2005. China’s ongoing deregulation of the advertising market in China will expose us to greater competition with existing or new advertising companies in China including PRC subsidiaries of large well-established multi-national companies.

Comment: Some of those Western advertising companies focused on the China market include Viacom (ticker: VIA), Interpublic (ticker: IPG), JCDecaux (ticker: JCDXF) and WPP Group (ticker: WPPGY).

Final Comment: Target Media, which is backed by The Carlyle Group was expected to go public in the US sometime this year. Does this deal say something about prospects for China tech IPOs in 2006 or is it a testament to Focus Media's success that made selling out the right move? Based on Focus Media's success in the public markets (see chart below) wouldn't Target Media have wanted to test the waters?

You can access a full transcript of Focus Media's latest earnings conference call here.

All China Stock Blog articles on Focus Media here.

FMCN chart.