Bottom line: Focus Media’s plan for a backdoor listing in China stands a better than 50 percent chance of success, potentially opening a new re-listing path for Chinese firms whose shares are undervalued in New York.
Former advertising services high-flyer Focus Media is eying a plan to become listed again, with an ambitious target of tripling its value from just 2 years ago when it privatized. If the plan really works, it could create an attractive template for a return to publicly-traded status for the group of about a dozen Chinese companies that were formerly listed in New York but privatized after their shares became undervalued. The key to the plan appears to be a decision to list back at home in China, where Focus’ name is more familiar and local investors are far less sophisticated and prone to hype and overinflating values of well-known companies.
I should also be fair here and say that Focus management has probably worked hard these last 2 years to clean up the company, which was privatized in mid 2013 in a buyout led by the management and US private equity giant Carlyle. (previous post) The company was previously somewhat problematic, after embarking on an acquisition binge that left it with many underperforming assets. But many of those assets have presumably been sold off or closed by now and the company’s shareholder structure has probably been simplified, making it a more attractive investment option.
According to the latest reports, Focus has launched a broader plan that would ultimately see it perform a backdoor listing on one of China’s domestic stock exchanges. (Chinese article) The plan would see it identify a target shell company, and then inject itself into the company. This kind of move is fairly common for some major Chinese companies that want to list in Hong Kong. Many smaller companies have also used this vehicle to list in the US, though major firms almost always prefer traditional IPOs.
The reports say Focus is currently reforming its share structure, but don’t indicate it has identified a target shell company yet to execute its plan. They say the company ultimately plans to inject about 20 percent of its share into the new listed company, and is hoping to get a market capitalization of about 46 billion yuan ($7.4 billion) after re-listing. That would be nearly triple its $2.7 billion market value when it de-listed 2 years ago.
The plan looks a bit unusual as it’s the first time I’ve heard of this kind of backdoor listing for a major firm on one of China’s stock exchanges. That’s probably because China’s stock markets are still relatively young, having been launched in the early 1990s, and thus don’t have a strong stable of companies that continue to trade even though most of their business is defunct. But the group of such shell companies is probably fairly large by now. What’s more, the regulator may even welcome such takeovers since it’s notoriously difficult to force these companies to de-list.
All of that said, investors and other recently privatized Chinese companies will all be watching the Focus plan closely to see how it fares. There are several potential risks that could scuttle such a deal. The 2 largest of those would be interference from the regulator, and an abandoning of the plan if Focus can’t find a suitable target and get a valuation that makes such a route worthwhile.
Online game operator Giant Interactive was another former high-flyer that de-listed from the New York Stock Exchange last year and discussed a re-listing in China. Other privatized firms that could also consider such a route include hotel operator 7 Days, information technology outsourcing firms Camelot and Pactera, and drug maker Simcere. At the end of the day I would give Focus’ plan a better than 50 percent chance of success, which could touch off a new wave of New York privatizations followed by similar backdoor listings for Chinese firms in Shanghai and Shenzhen.
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