IPOs: Focus Media Tries Again on Tough Road Back to China

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Bottom line: Focus Media’s latest backdoor listing plan could stand a 50-50 chance of success, and should come as a warning of the difficulties that may face many other US-listed Chinese firms hoping to privatize and re-list in China.

Focus Media in new backdoor listing plan

You have to admire the persistence of Focus Media, the outdoor advertising specialist that’s trying to blaze a new homecoming trail for US-listed Chinese firms trying to privatize and re-list in China to get higher valuations. More than 2 years after leaving the Nasdaq and one failed re-listing attempt in Shenzhen, Focus is trying again with a new plan for a backdoor listing via a Shenzhen-listed shell company called Hedy Holdings (Shenzhen: 002027).

I’m actually being just slightly facetious in admiring Focus for its persistence, since it really has very few other options in this case. Big investors including US private equity giant Carlyle put up billions of dollars to help Focus de-list in 2013, and now they’re simply looking to recoup their investments and hopefully make some profits by re-listing the company at a higher valuation in China.

More broadly speaking, Focus’ rocky road back to China reflects the difficulties other US-listed Chinese companies could face, as many attempt to privatize and return home to re-list with higher valuations. The backdoor listing plan that Focus is trying is widely used in Hong Kong and New York, requiring far less work than a traditional IPO by using an existing shell company as the re-listing vehicle.

But the technique is far less common in China’s stock markets that have only a quarter century of history, and where frequent market manipulation makes the regulator wary of such schemes. Adding to the question marks is the recent volatility in China’s stock markets, including the latest sell-off that could ultimately cause Focus to get a far lower valuation than it previously hoped for.

The latest backdoor listing would see Hedy acquire Focus through an asset swap and issue of new shares, along with some cash, all worth a combined 45.7 billion yuan ($7.1 billion). (English article; Chinese article) Hedy will also issue 5 billion yuan in new stock to help finance the deal, it said in a statement to the Shenzhen stock exchange. (company announcement)The 45.7 billion yuan figure is identical with Focus’ original  backdoor listing plan using Shenzhen-listed Hongda (Shenzhen: 002211), even though that plan later fell apart.

Higher Valuation

The latest $7.1 billion figure appears to be the valuation that Focus believes it can get from the new listing, which is about 77 percent higher than the $4 billion it was worth when it de-listed from the Nasdaq in mid 2013. While that number isn’t bad, it’s also worth noting that many premier Chinese Internet names listed in New York have also rallied over that period.

For example, shares of leading search engine Baidu (Nasdaq: BIDU) are up more than 50 percent between the time when Focus finally de-listed and the present, and its stock was actually ahead by much more before a recent sell-off over the last 2 months. But Focus doesn’t enjoy the same premier reputation as Baidu, and neither do many of the more than 3 dozen smaller US-listed Chinese companies that have launched similar privatization bids this year.

Feeling unappreciated by US investors, Focus de-listed and originally tried to use Hongda to re-list in China earlier this year. But that plan ran into trouble after Hongda and its chairman were investigated for possible securities violations. Later reports said that Focus was considering a listing on a new enterprise board being planned to launch in Shanghai as soon as later this year. (previous post) But the company also abandoned that plan, probably because the new board could be delayed indefinitely due to the recent volatility in China’s stock markets.

The moral of all this is that Focus is blazing a new trail for this kind of re-listing, and is quickly discovering the many difficulties that others will also experience if they try a similar path. This latest plan with Hedy could easily run into similar issues if it receives heavy scrutiny from a wary securities regulator, which seems likely. But in the end I do expect that Focus will ultimately re-list somewhere in China, though perhaps with a sharply lower valuation than it was seeking.

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