China-based Focus Media Holding Ltd. (FMCN) is still the subject of a bid led by its CEO Jason Jiang and backed by big name private equity firms, including Carlyle. Some shareholders have claimed that the $27 a share bid is too low. But the offer is subject to due diligence. This company has been the subject of numerous claims about its accounts not being quite up to scratch in the past, and if the bidders walk, the shares will almost certainly collapse. I advised shorting the stock and detailed past claims on Aug. 30, with the stock at $24.51 on the basis that the downside was $2.49, but the upside could easily be $14.51.
In light of a series of allegations made by the Bronte Capital Blog within the past few hours, I would suggest that this bid is less and less likely to go through. The allegations may well be dismissed by Carlyle, but I would not bet on it. They certainly raise issues. Thus, at $24 the case for staying short has just become quite stronger.
The claims fall into two camps. The first claims, which you can read about here and here, concern a loan allegedly made in 2006 to the company by the father of CEO Jiang to cover a "looming shortage of Renmimbi." It is odd that this loan had to be made, given that just two months earlier the company had raised $65 million via a share placing, which also saw a number of shareholders (including Jiang) sell $220 million of stock. The Bronte Capital Blog discusses a number of possible interpretations of why this loan had to be made, none of which look terribly good for Focus Media.
The allegations published today, Sept. 13, are in theory even more damaging, and can be read about here. They concern a number of transactions where companies were bought by Focus for large sums and then sold back to the original owners (all registered in the British Virgin Islands) for virtually nothing. Again, there are several interpretations of what this may mean, which Bronte Blog covers in detail.
The standout transaction is the purchase of the Wangmai assets from Richcom International BVI for $2.7401 million on Aug. 15, 2007. The assets were given back to Richcom for a nil consideration on Dec. 14, 2009. The odd thing is that Richcom actually only came into existence in October 2007. It has since been struck off for non-payment of a fee. The address of all the vendor companies (six of them), all owned by separate folk who have nothing to do with Focus, is -- strangely enough -- identical.
I suggest very strongly that those bullish about this stock read these articles with a great deal of care. Given the stream of allegations, my own conclusion is that if the bid does not go through, this stock will utterly collapse. As I argued here yesterday, the whole Chinese economy is heading for a severe crash. That cannot help. But this is not a macro call -- this is stock-specific. The risk/reward tradeoff for going short is now significantly improved.