Focus Media Acquires Competitor CGEN Digital: Smart Move

Focus Media (FMCN), China's largest out-of-home advertising company, have been constantly acquiring others ever since it first listed on Nasdaq. A Wall Street analyst once told me it had acquired about 30 companies, big and small, so far; that is almost one per week. While not every acquisition it made was a great deal, its recent acquisition of CGEN Digital Media (ADTV), right before CGEN's own IPO, was considered a good buy.

CGEN, a company which uses flat-panel television displays to play advertisement in hypermarkets in China, filed its listing document with the U.S. Securities and Exchange Commission on November 14, raising up to US$ 138 million. It was to be listed in Nasdaq last week, when Focus Media announced its acquisition.

Focus bought CGEN for US$168 million in cash, plus another US$181.6 million in cash and stock if CGEN meets certain earning targets in the next two years. The transaction valued CGEN at 17.5 times CGEN's 2008 expected earning, said Focus. Focus is trading at about 27 times its 2008 expected earning, according to Morgan Stanley.

"With its cash and liquidity, Focus has nothing to loss to buy CGEN, which is at a lower price earning ratio," said a venture capitalist who is an earlier investor in CGEN, "It also results in fewer competitors for Focus."

"AirMedia and VisionChina have already listed in Nasdaq. There is no way Focus let one more of its competitors getting listed," he added.

AirMedia operates similar businesses in airports and on airplanes, while VisionChina does it on buses. Focus Media was trying to buy AirMedia before its IPO, but in vain, according to an earlier report. There was perhaps more incentive for Focus to buy CGEN, as its own in-store network division was losing out to CGEN. (Focus has no network in airport/airplanes or buses.)

Focus Media's in-store network revenues declined 11 percent to US$7.1 million in the third quarter from a year ago, said Jason Brueschke, head of Asia internet / media research of Citigroup in a report. Gross margin deteriorated dramatically, to 17.7 percent from 28.4 percent in previous quarter. Before the acquisition, Mr Brueschke expected margins to remain under pressure, as "Focus faces continued intense competition from main competitor CGEN."

According to market research firm Sinomonitor, CGEN covered 67 percent of the hypermarket that have installed in-store advertising digital displays in 24 major cities. Its network, a total of 534 stores across 65 cities, covers the biggest names in retail: Carrefour, Century Mart, Wal-Mart, Wu-Mart and B&Q. And, it has contractual rights to extend to additional 540 stores. Its revenue grew to 142 million yuan for the six months ended June, from 48 million yuan a year earlier. It made 54 million yuan in profit for the first half of this year, from a loss of 12 million yuan a year earlier.

Focus Media's own in-store network, on the other hand, covered 695 supermarkets and 2,080 convenience stores. Mr Brueschke estimated the company was making only a small operating profit.

Morgan Stanley executive director Richard Ji said the CGEN acquisition might help Focus to ease the in-store advertising war. "Focus may scale back advertising discounts thanks to its rising dominance and higher pricing power," said Mr Ji. "Due to increasing bargaining power, Focus may experience slower concession cost hikes and hence margin expansion for its in-store network." Morgan Stanley increased Focus Media's 2008 and 2009 earning estimates by 6 percent and 7 percent after the acquisition.

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