In case AirMedia Group (NASDAQ:AMCN) investors are wondering why the share price is under pressure, here are some of my conspiracy theory answers gathered mainly from published Chinese company websites and financial blogs and attributed to senior company officials.
The whole thing started when Chairman Guo of AMCN and Longde Wenchuang Fund Management Co., Ltd. (Longde) conspired to jointly strip the profitable advertising business from the company and list it back in China, either on its own through an IPO or a reverse merger with a listed shell, in order to capture the possible higher valuation obtainable in the then booming Chinese share markets.
Why I say it is a conspiracy? In the Longde sale announcement, it was stated that "all parties agree to cooperate with each other and endeavour to sell restructured AM Advertising to companies listed on the A-share market of the stock exchanges or New Third Board in China or through the independent initial public offering on China's stock exchanges or New Third Board in the future." So it is dressed up to look like a joint effort between Longde and AMCN to do the China listing exercise, which if successful, will benefit all shareholders alike. But within a few days, Chairman Guo came out with his buyout offer, which would then exclude the outside shareholders from the potential upside. He could not have thought of the buyout in just such a short time after selling to Longde, so it has to be part and parcel of the whole scheme all along.
To achieve that, Longde would first purchase 75% of AM Advertising for RMB 2.1 billion, in order to provide the cash needed by Chairman Guo to privatize AMCN. A bridging loan for the buyout was then arranged with China Merchants Bank New York branch, possibly to avoid having to apply for exchange control permission to remit the RMB overseas, as China is tightening on the outflow of foreign reserves. This is to be backed by a 108% collateral arrangement at the bank's Beijing branch and I have earlier assumed that the buyout group would probably take the easy way out by directly pledging the company's cash. This may possibly be illegal under the British common law system (which Cayman laws are also based on), which generally prohibits a company from directly or indirectly financing the purchase of its own shares. But in a lengthy on the record interview with the company CFO by a contributor to this blog, the former confirmed that the buyout group is trying to fund the collateral themselves but has hit some road blocks along the way, as explained further later.
When the sale to Longde was first announced in June 2015, the agreement provided for completion within 3 months, i.e. by September, but this was delayed until March 2016. There was no official explanation given for the delay, but the CFO disclosed that this is likely due to the legal problem encountered by AMCN in the restructuring of the Variable Interest Entities (VIEs) involved, which was a condition precedent for the completion.
For those unfamiliar with VIE, it is a controversial legal arrangement to bypass the restriction against direct foreign ownership of certain designated Chinese industries, including advertising. VIEs are nominally owned by Chinese nationals/entities in the share register, but the economic benefits of that ownership have been assigned to the foreign holding company through various legal arrangements, which allow them to be recognised as subsidiaries in the latter's books. The danger with VIE is that the nominal shareholders can later try to reclaim their ownership rights, as was the case with one of the company's founder and former shareholder/CFO. Because of differences, he sold his shares and left the company, but the latter forgot to get him to transfer out the shares in the various VIEs held in his name. He had then refused to transfer his shares in the VIEs to the new holding company in the restructuring exercise and the company had to go to court to compel him to do so. Even though the court ruled in the company's favor, it was too small a matter for the authorities to expedite the enforcement of the judgment, and Chairman Guo had no choice but to exercise the power of attorney held by him as part of the VIE structure legal safeguards to sign the transfer documents in order to complete the share sale. In retaliation, the former shareholder has now accused Chairman Guo of forging his signature in the share transfer documents and the case is now pending in court.
In spite of having earlier agreed to do the China homecoming exercise together, Longde broke rank and entered into negotiations with Shanghai-listed Shanghai Golden Bridge Info Tech Co. Ltd (Jinqiao) to inject its 75% of AM Advertising for a backdoor listing, details of which are in my earlier article here. This has put Chairman Guo in an untenable position. According to the CFO, if Longde succeed in flipping AM Advertising to Jinqiao at a big premium to their cost, the independent advisors to the buyout may then require a new valuation for AMCN because of its 25% remaining shareholding in AM Advertising. This will necessarily delay the buyout and affect the present offer price. If Longde is found to be a concert party with Chairman Guo, the latter may then be charged for fraud and insider dealing in disposing of AM Advertising cheaply for a personal gain. That is why the China listing is supposed to be done together only after the buyout, when there will be no more outside shareholders to answer to.
To protect himself, Chairman Guo has no choice now but to try to disrupt the Jinqiao deal by invoking the shareholders' pre-emptive right to purchase shares from another shareholder who wishes to sell to an outside party. This will mean buying back the AM Advertising shares from Longde and the end of the whole China listing and going private exercise. Otherwise, after 30 days, the pre-emptive rights will lapse and Longde can then proceed as before.
While Chairman Guo is sweating over his legal problems, the CFO has disclosed that a member of the buyout group is having a change of heart and wanted to pull out, along with his share of the bank collateral commitment. Chairman Guo is putting up his shares as part of the collateral, but with the recent drastic fall in the share price, he will need to top up his margin, as well as source a replacement for his departing partner. This is why the buyout offer is now in a limbo and sets up a vicious cycle for the share price and his collateral requirement. The longer the delay, the lower will be the share price and the more collateral Chairman Guo will have to put up.
One of the fallout from the friction between Chairman Guo and Longde is the delay in the quarterly results announcement for AMCN. As the new controlling shareholder, Longde has not supplied the financial figures of AM Advertising to AMCN, who is then unable to do the equity accounting for its 25% stake. This is one of the pressure point that Longde can apply on Chairman Guo, since they are now in the driver' seat of the only profitable business in AMCN.
My guess is that Chairman Guo is holding the weaker hand in this poker game. To exercise AMCN's pre-emptive rights under the law means buying the shares at the same price that the new buyer is prepared to pay, not at the original price sold to Longde, so if there is a substantial premium attached, it can be prohibitively expensive to do so. In addition, the buyout offer will then need to be aborted and the buyout group is liable for the break penalty. So it is more of an empty threat than a real option available to Chairman Guo to stop the Jinqiao transaction. Besides, he only has a maximum period of 30 days to do the repurchase, failing which the right will automatically lapse, so Jinqiao can just wait him out.
So what is going to happen to the AMCN and the buyout offer, which has been propping up the share price until recently? The rational way out would be for Chairman Guo to abandon his buyout, as the bus is leaving the station without him. To continue and try to negotiate a separate deal to inject his 25% into Jinqiao would expose him to unpredictable legal liabilities, like conspiring to sell the business below market to his concert party, self dealing, conflict of interests etc. I think the market is already discounting the buyout offer as a long shot for the time being, with the core value being the 25% of AM Advertising which if listed back in China, can still be of some value on an equity accounting basis.
Another compelling reason for abandoning the buyout is that the cash in the company's kitty is then available to invest in some other profitable ventures instead of being wasted in the buyout. In a slowing economy, RMB 2.1 billion is a sizable war chest to go bargain hunting and hopefully, turn the company around. But I am not keeping my hopes up, as throughout these months that I have been following the company, it has displayed very poor corporate governance expected of a listed company, including what I would label as misrepresentation and non-disclosure of material information.
What stands out so far from this continuing saga is the complete disregard for the rules on disclosure of material information by company officials. They thought nothing about giving on-the-record interviews in the Chinese media, and yet, nothing equivalent in English for the rest of the non-Chinese speaking investors. I read about the AMCN pre-emptive rights lawyer letter to Jinqiao on the latter's website, but nothing on AMCN's. How can shareholders make proper investment decisions on their shares when they are kept out of the information loop here, but in China, it is public knowledge?
What shareholders should be complaining is the selective disclosure of material information in the Chinese media, which is against exchange listing rules and puts foreign shareholders at a disadvantage in dealing with their shares.
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.