China Buyouts Come Into Focus

Thank Muddy Waters for China's biggest ever buyout. The short-seller's attack on Nasdaq-listed Focus Media triggered a proposed $3.7 billion offer from the company's chairman and a bunch of private-equity firms, including Carlyle.

But the attack was last November. The offer was announced in August. It will be weeks before the potential buyers know if they've been successful. That's about a year since the company's American depositary shares fell by two-thirds after Muddy Waters said the advertising display company owned fewer panels than it claimed—allegations Focus Media refutes.



What's taken so long?

The logical conclusion of a wave of short-seller reports slamming U.S.-listed Chinese stocks was that a wave of going-private transactions would follow, as company insiders, backed by PE firms, bought the businesses at deflated prices with the aim of relisting later, probably in Hong Kong or Shanghai. That's happened, but at a gentle trickle—not a tidal rush.

The Focus Media example shows investors aren't quick to jump to the buyout route. For starters, insiders who have faith the shares will bounce back are reluctant to delist. (Focus Media's shares have regained much lost ground in recent months.)

Then there are minority investors. Delaware incorporated companies going private almost certainly face a lawsuit from investors alleging they're being bought out too cheaply. At Focus Media, a Cayman corp., some minority shareholders are kicking up a fuss, saying the $27 per share offer is too low—though it's 6% above the price before Muddy Waters' report.

Litigation can cause delays, more fees and uncertainty. A deeper concern though is accessing debt to support the buyout. The Focus Media proposal includes about $1.6 billion of financing from Citigroup, Credit Suisse and Singapore-based DBS. They've provided letters saying they're "highly confident" of funding the deal. But final approval means persuading credit committees that Muddy Waters was wrong and that they can get their cash back.

Finally, there's the exit strategy. An IPO would be tough until equity markets pick up, and an onward sale—through a listing or to another buyer—means polishing up a tarnished reputation too. Simply put, a big impediment to a surge in going-private deals may be that mud tends to stick.

Source: http://online.wsj.com/article/SB10000872396390443819404577632810235688038.html