chris8sirhc
12 년 전
NEWEST BLOG POST ON FMCN:
link to original:
http://brontecapital.blogspot.com/2012/09/focus-media-three-interpretations-which.html
"Monday, September 17, 2012
Focus Media: Three interpretations - which one is right
This blog has demonstrated a bunch of bizarre transactions in Focus Media's accounts. In particular I have focussed on transactions during 2009 in which vast sums appear to have been lost in businesses that were acquired from companies formed only months before acquisition. In each of these cases the business was sold or mostly given back to the original owner.
Here is the disclosure I focussed on (but there are other strange disclosures I could pick):
2009 Disposition
In 2009, we aborted a contemplated initial public offering for its Internet advertising segment due to the economic recession in late 2008. As a result, between August and December 2009, we disposed of six underperforming subsidiaries in that segment through a series of individual transactions with their respective original owners. Each of the subsidiaries was considered a component of our company, and their results have been included in discontinued operations in the consolidated statements of operations. The results of discontinued operations include net revenues and pretax losses of $127.6 million and $45.4 million, respectively, related to these subsidiaries. We recorded a loss on disposal of $44.1 million.
The following table summarizes the acquired subsidiaries in the mobile handset advertising services segment and Internet advertising segment that were sold back to their original owners in 2009:
Acquisitions
Date of
acquisition
Business segment
Proceeds paid Date of
Disposal Loss on
disposal
1.
Catchstone(1)
2007-4-16
Internet advertising
$ 14,489,647 2009-12-22 $ 11,560,617
2.
WonderAd(2)
2007-9-15
Internet advertising
$ 14,926,003 2009-11-30 $ 14,926,003
3.
Jiahua(3)
2007-8-15
Internet advertising
$ 7,659,158 2009-12-1 $ 7,659,158
4.
Wangmai(4)
2007-9-1
Internet advertising
$ 2,749,158 2009-12-14 $ 2,749,158
5.
Jichuang(5)
2007-12-1
Internet advertising
$ 366,032 2009-8-24 $ 366,032
6.
1024(6)
2008-3-1
Internet advertising
$ 3,397,124 2009-12-18 $ 3,397,124
7.
Dongguan Yaya(7)
2007-10-1
Mobile handset advertising services
$ 1,540,612 2009-2-28 $ 1,588,110
(1) The original sellers which subsequently repurchased Catchstone were Only Education Holding Limited and Maxnew Holdings Limited, BVI companies owned by a single PRC individual unrelated to our company.
(2) The original seller which subsequently repurchased WonderAd was Megajoy Pacific Limited, a BVI company ultimately owned by seven PRC individuals unrelated to our company.
(3) The original sellers which subsequently repurchased Jiahua were two PRC individuals unrelated to our company.
(4) The original seller which subsequently repurchased Jichuang was Richcom International Limited, a BVI company owned by a single PRC individual unrelated to our company.
(5) The original sellers which subsequently repurchased Keylink Global Limited were four PRC individuals unrelated to our company.
(6) The original sellers which subsequently repurchased 1024 were two PRC individuals unrelated to our company.
(7) The original sellers which subsequently repurchased Dongguan Yaya were Sinoalpha Limited and Max Planet Limited, BVI companies each of which is owned by a separate single PRC individual unrelated to our company.
The main thing demonstrated was that all the British Virgin Island (BVI) companies above:
* had the same address despite being explicitly unrelated parties,
* had the same phone number despite their non-related status,
* in all cases except one had been formed only a few months before they sold a business for millions of dollars to Focus Media
* in the exception had been formed after they sold the business to Focus Media
* had in all but one case later been struck off the register for non-payment of a fee.
Moreover the companies given back in 2009 were given back with a lot of cash (some 27 million dollars) embedded in the companies as they were given away. Focus Media on the disclosed accounts appear to have given away cash.
Three interpretations
I originally had three interpretations of this disclosure. These were
(a). The accounting statements absolutely straight, Focus Media really did buy all these businesses, lose a huge sum of money on them and gave them back to their original owners,
(b). Focus Media used these transactions facilitate the mass looting of the company. That is the money was not really lost, but rather the business were purchased and given back to their original owner as part of some scheme to steal from the company.
(c). That the losses were fake - a form of profit washing. In this interpretation Focus Media reports fake earnings (say inflated revenue or deflated cost, most likely inflated revenue) and this loads the balance sheet with fake cash. The fake cash needs to be removed (or the auditors will find it or shareholders demand it) so the fake cash gets removed from the balance sheet with fake losses on rubbery transactions.
Two interpretations left
On the information as discovered so far interpretation (a) above requires one to believe that all these seemingly unrelated parties found the same lawyer to register their BVI entities and that these businesses generated millions of dollars in net worth in a few months before they were sold to Focus Media.
Indeed you need to believe that Richcom, which was not even in existence, had a business that Focus Media was happy to buy for millions of dollars.
There are scenarios where interpretation (a) remains possible. For instance if all the Chinese entrepreneurs had the same lawyer and hence all the addresses are the same, and that lawyer was sloppy and forgot to actually register Richcom. They might have the same lawyer because they socialize at the same Karaoke bar.
However interpretation (a) requires this unlikely combination of circumstances.
This leaves two remaining interpretations (b) and (c) above. Either the company was being looted or there were fake profits and the losses described above were fake losses whose accounting function was to make the books balance when there were fake profits elsewhere.
These two interpretations have wildly different implications for the future of Focus Media
The main response to my posts is to say that all I have demonstrated was that Focus Media prior to 2009 was a very dodgy company. Bill Bishop - one of the more sophisticated China watchers - tweeted as much:
10 SepBill Bishop ?@niubi
@LongShortTrader @John_Hempton Pre crash fmcn had lots of the crap you and muddy waters have documented, post crash fmcn cleaned up
Expand
Reply
Retweet
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Indeed this was also the response to Muddy Waters who alleged fraud at Focus Media about a year ago. There were just a bunch of dodgy transactions.
But my interpretations (b) and (c) above have wildly different outcomes for the stock.
If the company was being looted - as say Bill Bishop and many others imply - then there was something there to loot.
Something there to loot suggests the company really is valuable.
Once the looting stops (and you would presume it would stop after being taken private) then the cash flow is real and can service lots of debt and make the PE buyers rich.
If however (c) is true then the losses recorded in 2009 were fake losses - then the profits recorded were fake profits. If this is the case then the company can't service lots of debt (the profits were fake and you can't service real debt with fake profits) and the PE deal will collapse.
Indeed if the profits were not real then there is nothing there to loot, nothing of any real value - and an end value for the stock is below $2 (and I think probably below $1).
The accounts since 2009
The accounts since 2009 have shown a fairly steady build up of cash and financial assets. The two interpretations have something to say about that.
In interpretation (b) the company was heavily looted in 2009. However it is a valuable company and since then that value has accumulated as cash on the balance sheet. To believe this you have to assume that the management were evil but they somehow turned good.
In interpretation (c) the company was not looted in 2009, just a huge pile of accumulated fake cash was removed from the balance sheet by having fake losses. Since 2009 the company has continued to accumulate fake cash. Eventually that fake cash will also need to be removed from the balance sheet. This situation is just like at the end of 2008 where this interpretation would imply the company had also accumulated a bunch of fake cash only to have it removed by fake losses in 2009. To believe this you have to believe the company is currently accumulating fake assets (including some fake cash).
It is of critical importance to the stock to work out which is true. If (b) is true this deal will close and you will get $27 a share. If (c) is true the deal is likely to fail - and the downside is to maybe a dollar or two a share. [There are reasonable scenarios where the downside is to zero...]
Indications that it might be C and the shares are nearly worthless
There are several things that indicate that it is more likely to be (c) than (b). Here are a few.
The company had a Renminbi shortage in 2006
I know it is a long time ago - but this is a startling disclosure:
In March 2006, Weiqiang Jiang, the father of Jason Nanchun Jiang (the CEO/controller of Focus Media), provided a short-term loan to the Group of approximately $2.5 million to relieve a temporary shortage of Renminbi the Group experienced at that time. The loan is unsecured and was provided to us at no interest. The loan will become due and payable in full on June 30, 2006.
The company disclosed a "temporary shortage of Renminbi". At the time the balance sheet showed plenty of cash and cash generation. The only way that there could have been a Renminbi shortage is if the cash was fake. And the cash was only fake if the earnings were fake. Moreover a Renminbi shortage implies almost no net cash generation - consistent with a worthless or nearly worthless share.
The disclosure of a Renminbi shortage is consistent with interpretation C.
The company appeared to pay cash to a company that did not yet exist
In August 2007 Focus Media purchased a business from Richcom International for over $2 million. The only problem is that Richcom International was not formed until October 2007. In other words it appeared to pay cash to a company that did not exist.
A company that does not exist has a very hard time opening a bank account and hence has a hard time receiving cash.
But it has no problem receiving fake cash (you don't need a bank account for that).
This is consistent with interpretation C. Fake cash paid comes from fake profits.
In 2009 the company essentially gave away almost all the subsidiaries it disposed of, but the accounts showed that those subsidiaries had 27 million in embedded cash
Above there is a list of companies disposed of in 2009. All of those were given back to their original owners. In some cases a small consideration was paid.
However the cash flow statement for the year shows that in excess of 27 million dollars was embedded in the companies that were given back to their owners in 2009.
This could be looting - but is particularly blatant - just giving away cash.
The alternative hypothesis is that the cash embedded was fake. This appears more reasonable to me than actually blatantly just giving away cash.
The company used to overstate its number of movie screens
Overstating things like numbers of movie screens is consistent with overstating revenue. Overstating revenue will give you fake cash as per (c) above.
The company used to say that it had 27,164 theatres on which it displayed averts. There were less than 1600 in all of China at the time. This sort of overstatement leads one to question whether other things are being overstated - and hence fake cash is being produced.
That is supportive of interpretation (c) above.
The company claims extremely high revenue per movie screen
The company later restated down the number of movie theatres it displayed in - but it never restated down the revenue from those theatres. Revenue per theatre ran at over $27 thousand average last year - above the average and near the high-end of US revenue per theatre.
Moreover it was running at roughly a $40 thousand per theatre run-rate in the fourth quarter of last year. That is above the peak in the US.
Advertising rates in China are substantially lower than the US. Moreover my independent inquiries suggest the revenue per screen in China is closer to $7,500 per year.
Overstated revenues means fake earnings and fake cash as per interpretation (c) above.
The company overstated and restated down the number of LCD screens it has
The company recently reclassified a whole lot of screens in the LCD business to the poster-frame business. The reason given was that they were originated by the LCD business and hence counted as LCDs. Perhaps plausible but also consistent with generally overstating things and hence overstating revenue.
Overstated revenue leads to fake cash as per explanation (c) above.
The company claims to make huge margins from a business that nobody finds profitable elsewhere in the world
How many 17 inch displays showing adverts have you seen in residential buildings in countries other than China? They do not exist in Australia. I have not seen them in New York. Sometimes in office buildings or hotels (usually advertising the facilities of the hotel). Never in residential buildings.
That is because nobody can make them profitable in residential buildings outside China.
However they claim over $3000 per screen of revenue in China. If you could get that much revenue in China (where advertising rates are low) you could get more elsewhere and the screens would grow like mushrooms in dark elevator lobbies all over the planet.
They are not.
Either China is really different or the revenue and profits are overstated in China as per interpretation (c) above.
Summary
Most of the evidence is consistent with (c) above. The strange transactions are not looting as the bulls in the stock would suggest. Interpretation (c) is that these transactions are the washing of fake profits by producing offsetting fake losses.
In that case the business earnings are not real and the business cannot support all the debt that the PE firms will laden it with. The private equity deal will fail as the debt defaults.
It is hard to tell what the stock is worth absent a PE bid. However as nobody can make an LCD business substantially profitable in (say) America what is it worth in China where advertising rates are lower?
John
PS. There is someone associated with this deal who has been arrogantly telling friends that they love this blog. They say I am keeping the pricing pressure down and making this deal easier.
If interpretation (c) is right this deal will collapse spectacularly after it closes (the debt will default, the PE buyers will get nothing). And you were warned and continued regardless.
The explanation for your recent arrogance is probably "deal fever". But as I said at the beginning of this sequence of posts private equity has the ability to due diligence and your limited partners will be expecting rigour over hubris.
If you do the deal and it fails spectacularly (despite ample warnings) your limited partners and the regulators will believe something worse than hubris. Probably far worse.
My guess for what they will believe: that you did this deal knowing it to be fraudulent and that you got kick-backs for doing it. They will believe you looted your own funds. That belief may or may not be true - but that is what they will suspect.
If interpretation (c) proves correct and you close this deal your career (and possibly your whole life) will get very difficult indeed.
Of course if I am wrong and interpretation (a) or (b) is true this will be a great deal. Go for it."
chris8sirhc
12 년 전
Is this more bad news for the buyout?
"Robbins Umeda LLP Announces an Investigation of Focus Media Holding Limited"
" Shareholder rights firm Robbins Umeda LLP has commenced an investigation into possible breaches of fiduciary duty and other violations of the law by members of the board of directors of Focus Media Holding Limited (NASDAQ: FMCN) in connection with their actions in relation to a non-binding proposal letter from affiliates of FountainVest Partners, The Carlyle Group, CITIC Capital Partners, CDH Investments, and China Everbright Limited, and Mr. Jason Nanchun Jiang, Chairman of the Board and Chief Executive Officer of Focus Media, and his affiliates (collectively, the "Consortium Members") that proposes a going-private transaction. Concerned shareholders who would like more information about their rights and potential remedies can contact attorney Gregory E. Del Gaizo at (800) 350-6003, info@robbinsumeda.com, or via the shareholder information form on the firm's website.
On August 13, 2012, Focus Media announced that on August 12, 2012, it had received a proposal for a going-private transaction from the Consortium Members. Under the terms of the proposal, Focus Media shareholders would receive $27.00 in cash for each American depository share ("ADS"), or $5.40 in cash per ordinary share.
Robbins Umeda LLP's investigation focuses on whether the board of directors at Focus Media is undertaking a fair process to fully consider the proposal by the Consortium Members and obtain maximum value to adequately compensate its shareholders. Notably, there are eight analyst price targets for Focus Media that are higher than the current offer of $27.00 per ADS, with Riedel Research Group maintaining a price target of $46.00 since June 6, 2012. Of further concern is whether the board of directors of Focus Media is acting for their own benefit in light of the fact that Mr. Jiang, Chairman of the Board and Chief Executive Officer of Focus Media, is part of the Consortium seeking to take Focus Media private.
Robbins Umeda LLP is a nationally recognized leader in securities litigation and shareholder rights law. The firm represents individual and institutional investors in shareholder derivative and securities class action lawsuits, and has helped its clients realize more than $1 billion of value for themselves and the companies in which they have invested. For more information, please go to http://www.robbinsumeda.com.
Press release link: http://www.robbinsumeda.com/shareholders-rights-blog/focus-media-holding-limited/
Attorney Advertising. Past results do not guarantee a similar outcome. ""
chris8sirhc
12 년 전
From SeekingAlpha: http://seekingalpha.com/article/864941-focus-media-new-bronte-allegations-make-it-a-strong-short
Focus Media - New Bronte Allegations Make It A Strong Short
September 13, 2012 | about: FMCN
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
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.
mlkrborn
13 년 전
By Melanie Lee and Soham Chatterjee
SHANGHAI | Mon Nov 21, 2011 10:41pm EST
SHANGHAI (Reuters) - Focus Media Holding Ltd (FMCN.O), a U.S.-listed Chinese company, said a short-seller's report accusing it of overstating its assets was "completely untrue," and it would make a statement refuting the allegations before U.S. markets open on Tuesday.
Influential short-selling firm Muddy Waters accused Focus Media, a digital media and advertising company, of inflating the number of its LCD screens, among other charges, wiping out two-thirds of the company's market value on Monday.
"The Muddy Waters report about Focus Media is completely untrue," Alan Ji, a spokesman for the company, told Reuters by telephone on Tuesday.
Short-sellers -- who borrow stocks and then sell them in the hope they will decline, so they can buy them back at a lower price -- have targeted Chinese companies listed in North America, bringing several to their knees with allegations of fraud and wiping out billions of dollars of shareholder value.
Focus Media's CEO Jason Jiang said in a posting on China's Twitter-like microblog service that short-sellers spreading rumors should be legally punished, and his firm will be vindicated by good fourth-quarter results.
Shares in the company closed at $15.43 on Nasdaq on Monday, losing $1.3 billion in market value. At one point, the stock slumped to $8.79, its lowest since September 2009. More than 77 million shares were traded, the most recorded in a single day.
Muddy Waters said Focus Media has been "fraudulently overstating" the number of screens in its LCD advertising display network -- in offices, stores and elevators -- by about 50 percent. It put a "strong sell" recommendation on the company's stock.
According to Thomson Reuters Starmine, 12 analysts covered Focus Media, of whom 8 had a "buy" rating, 3 a "strong buy" and 1 a "hold." The company has beaten analysts' earnings estimates for at least 8 straight quarters.
The share decline is the latest in a string of bearish notes from Muddy Waters, and its director of research, Carson Block, one of the most prominent short-sellers of Chinese companies listed in North America. Block was unavailable for comment late on Monday.
Of the six companies Muddy Waters has written on before Focus Media, only two continue to trade: Oriental Paper Inc (ONP.A) and Spreadtrum Communications (SPRD.O).
DEALS QUESTIONED
Focus Media operates flat-panel display screens in commercial buildings in more than 100 cities and has screens in elevators in 35 cities as well as in supermarkets and stores, according to its most recent earnings report.
Muddy Waters said Focus Media reported in regulatory filings that it has 178,382 screens, while, according to its media kit, it has fewer than 120,000.
The company has also "significantly and deliberately" overpaid for deals and has written down $1.1 billion out of $1.6 billion in acquisitions since 2005, exceeding the company's enterprise value by a third, Muddy Waters wrote.
"FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration ... as a result FMCN has an accumulated deficit of $437.4 million," it noted.
However, Credit Agricole Securities analyst James Lee said the Muddy Waters note stated things that happened two years ago, and this had already been reflected in the stock price.
"Two years ago, it was a hyper-competitive industry where people were making acquisitions at high prices. And they (Focus Media) wrote down financial investments in 2008-09, but we already lived through that cycle," Lee said.
In June, Muddy Waters accused Canada's Sino-Forest Corp (TRE.TO) of fraud. Investors lost billions of dollars and regulators and law enforcement officials in Canada are investigating the company.
The short-seller said Focus Media's overpayments include fraudulently booking at least six mobile handset advertising acquisitions it never made.
According to Nasdaq, a number of trades in the stock on Monday appeared to be erroneous, but all have been ruled legitimate.
(Reporting by Melanie Lee in Shanghai and Soham Chatterjee in Bangalore; additional reporting by Divya Sharma in Bangalore, Ryan Vlastelica in New York, and Nishant Kumar in Hong Kong; Editing by Ian Geoghegan)
conix
13 년 전
And the murkier it gets....
November 29, 2011
FMCN: Reiterating Strong Sell
NOTE: An earlier draft / discussion version of this report may have been inadvertently disseminated – this report is the only official version, and any content in an earlier version was for internal discussion purposes and should be disregarded in its entirety.
FMCN’s partial response to our 80-page November 21, 2011 report reinforces our Strong Sell rating.
FMCN’s response admitted that our estimate of fewer than 120,000 LCD screens showing full motion video advertisements is correct. Despite this admission, FMCN denied that it was fraudulently overstating the number of displays in its network because the 178,382 displays it discloses include 62,656 digital picture frames. FMCN’s response stated that it does not also count these digital picture frames in its poster segment.
There is strong evidence that FMCN does in fact double count these digital frames. However, in response to our report and in contrast to previous 20-F filings, FMCN has expanded the definition of its LCD commercial display network beyond full motion video, which makes a clear and final resolution of this point unlikely.
Therefore, FMCN at best prompted investors to think it had more motion displays than it does, and at worst fraudulently overstated the size of its LCD commercial display network. Both possibilities raise concerns about the health of this business line.
FMCN has fraudulently overstated the size of at least one other business line – through 2008, FMCN claimed its movie theater network was 17.6x the size of the potential market.
FMCN’s response did nothing to dispel our concerns about its acquisitions – namely that it deliberately overpays for, and unduly impairs in order to improperly give away, a substantial portion of its acquisitions. It is still clear that FMCN did not actually purchase six purported mobile handset advertising businesses, even as VIEs.
FMCN’s response that insiders’ self-dealing was to show “confidence” in the businesses is almost ridiculous enough to not merit a mention in this report. FMCN’s response cites a dubious valuation report as support for self-dealing in Allyes, yet FMCN does not provide answers as to why two outside individuals were allowed to earn $20 million on the transactions.
We believe that FMCN’s impending “independent” verification of the number of LCD screens in its network is likely to be compromised. There is precedent for this statement – FMCN’s audit committee previously undertook a flawed investigation into possible improprieties. As we discussed in our initial report, FMCN’s board’s is comprised of individuals who are largely entangled with management and whose compensation misaligns their interests from those of shareholders.
We maintain our Strong Sell rating on FMCN mainly because our concerns regarding the viability of FMCN’s core LCD commercial location network remain. This issue, combined with FMCN’s additional misrepresentations about the size of the network, FMCN’s opaque business model (on both the revenue and cost sides), and insiders’ penchant for self-dealing, render FMCN shares un-investable.
mlkrborn
13 년 전
Focus Media announced that it will host a conference call, in order to respond to allegations made in the Muddy Waters report, today at 8:00 ET (FMCN) 15.72 :
Focus Media Responds to the Allegations Raised by Muddy Waters
Date : 11/22/2011 @ 8:03AM
Source : PR Newswire
Stock : Focus Media Holding Limited ADS, Each of Which Represents Five Ordinary Shares (MM) (FMCN)
Quote : 15.43 0.0 (0.00%) @ 9:19AM
Focus Media Responds to the Allegations Raised by Muddy Waters
Print
Alert
Focus Media Holding Limited ADS, Each of Which Represents Five Ordinary Shares (MM) (NASDAQ:FMCN)
Intraday Stock Chart
Today : Tuesday 22 November 2011
Click Here for more Focus Media Holding Limited ADS, Each of Which Represents Five Ordinary Shares (MM) Charts.
Focus Media Holding Limited ("Focus Media") (Nasdaq: FMCN), China's largest lifestyle targeted out-of-home digital media company, responded today to the allegations raised in a research report by Muddy Waters dated November 21, 2011. The Company maintains that the allegations set forth in the Muddy Waters report (the "Report") concern matters which have long been disclosed in Focus Media's historical annual reports and press releases, misrepresent the information they present and attribute motives to management that are based on innuendo and fail to take into account business and commercial considerations relevant to the matters discussed in the Report. The Company denies the allegations entirely.
The LCD screen allegations unfounded and misunderstand the Company's business
The Report alleges that Focus Media has overstated the number of LCD screens in its LCD display advertising network and made false claims about the location and type of buildings in which its screens are placed.
The Report's allegation regarding the number of LCD display network screens in the Company's network is incorrect and reflects a misunderstanding in the types of devices used by the Company and their method of calculation. The Company's LCD display network consists of: (1) 116,026 LCD screens, (2) 32,478 LCD 2.0 digital picture screens and (3) 29,878 LCD 1.0 picture frame devices (the latter two types of which are devices distinct from, and not calculated in the number of, the picture frames used in the Company's poster frame network) as of September 30, 2011. The number of these types of screens currently totally amount to: 178,382. We believe that those responsible for compiling the Report based their calculation entirely on the number of basic LCD screens, and ignored the digital screens and LCD picture frame devices, erroneously believing the latter two to be part of the Company's picture frame network.
The breakdown of the LCD display network installed by different tier cities is showing as follows:
LCD screens
LCD 2.0 digital picture screens
LCD 1.0 picture frame devices
Total
%
Tier-1 cities
29,707
16,118
-
45,825
25.7%
Tier-2 cities
56,301
16,101
29,878
102,280
57.3%
Tier-3 and beyond cities
30,018
259
-
30,277
17.0%
Total
116,026
32,478
29,878
178,382
100%
The Report's understanding of the screen distribution of Focus Media's LCD display network is also incorrect. Total screens in the LCD display network in Tier 1 cities amounted to 45,825, or 25.7% of total screens; across 26 Tier 2 cities amounted to 102,280, or 57.3% of total screens; and across Tier 3 and 4 cities amounted to 30,277, or 17.0% of total screens. This distribution is consistent with and tracks the consumption power of the various tiers.
Moreover, approximately 30% of screens installed in high-traffic office buildings cover approximately 70% of the foot traffic according to a reputable third party survey. The remaining 70% of screens are distributed among residential buildings, urban mall areas and various entertainment venues.
In addition, the poster frame network – which is distinct from and not double-counted with the LCD network described above – consists of: (1) 34,711 "Frame 2.0 digital" picture screens and (2) 391,304 Frame 1.0 picture frames. The number of these types of screens currently totally amount to 426,015 as of September 30, 2011. The in-store network consists of 50,696 LCD screens as of September 30, 2011, which is in addition to the screens in the LCD display network and the poster frame network.
The rate cards applicable to each of these media types are different and the Company's advertising contract terms specify a building list as well as media type for each customer contract signed.
The Company will recommend to the audit committee to engage a third-party survey firm to conduct an independent accounting of its LCD, poster frame and in-store networks to confirm the Company's claims.
Allegations relating to historical acquisitions, impairment charges and write-offs impugn the motives of management without foundation or basis
The Company was historically extremely active in growing its business through acquisitions. These acquisitions included investments in the Company's core outdoor digital advertising business as well as investments into complementary areas outside its core business. Starting in 2009, the Company returned to its core outdoor digital advertising business after realizing that certain acquisitions – particularly in non-core areas – were not producing the results it had expected. The Company has pursued a focused strategy on its core business in recent years that has returned value to shareholders and validates the shift in the Company's business strategy.
The allegations in the Report amount to no more than a questioning and second guessing of the motives and business judgment of the Focus Media management. While the Company believes it has a track record of highly successful acquisitions, such as of Frame Media and Target Media, that greatly enhanced the Company's market and competitive positions, other acquisitions – with the benefit of hindsight – were not successful due to a number of factors, including macroeconomic trends, the financial crisis, the departure of key employees from acquired entities, changes in the regulatory environment. The Company denies that such transactions involved impropriety or wrongdoing.
With the benefit of hindsight, the Company's acquisitions can be divided into several categories:
* Core assets that provided significant value: The Company believes that major acquisitions including those of Target Media and Framedia fall into this category. These acquisitions greatly enhanced the Company's market position, removed major competitors from the market and contributed to the Company's overall profitability.
* Core assets that did not result in significant value: Transactions such as the acquisition of CGEN and the boat advertising venture are examples of instances where, although the Company was pursuing assets closely related to its core business, the acquisitions ended up not providing the anticipated benefits. There were a range of complicated factors for why these transactions were not as successful as management had hoped, including an unfavorable business environment, the departure of key employees of the acquired entities and other commercial factors.
In the case of CGEN, the Company eventually turned it into a profitable business. For the nine months ended September 30, 2011, the Company's in-store network generated gross profit of approximately US$23.0 million.
* Non-core assets that did not result in significant value: The Company decided to pursue an acquisition strategy into additional advertising areas including online advertising (Allyes), wireless advertising (Dotad) and advertising agency businesses (OOH and Dentsu). These acquisitions were pursued with the intention of delivering value to shareholders. A range of factors resulted in their being less successful than hoped for. For instance, in late 2008, new regulations banning the dissemination of unsolicited SMS messages led to the Company's decision to terminate the wireless advertising business and take an impairment charge for those assets. This was the direct result of the changes in the regulatory environment, and not a result of any impropriety or wrongdoing on the Company's part.
Unfounded allegations that management pursued acquisitions for their own improper benefit
The Report alleges improprieties in certain of Company's acquisitions and write-offs that claim the Company's management had interests in various counterparties and were made for the benefit of Company insiders. The charges are completely unfounded. The only acquisition transactions in which Company management had any interest have been Allyes and OOH, where all such interests were disclosed. The Report takes various facts out of context and impugns the motives and intentions of the Company, its management and its board for various commercial decisions that were made to further the Company's value to shareholders.
Allyes
In 2007, the initial acquisition of Allyes was made on the basis of an independent third-party valuation and was a strategic acquisition to expand Focus Media's advertising business from outdoor digital advertising to another area of advertising involving new media, as it was pursuing a strategy at that time to become China's largest digital media company.
In late 2008, largely as a result of the financial crisis and worsening business environment, Focus Media's share price declined significantly and the Allyes business suffered during the financial crisis. This resulted in an initial impairment charge of US$218.4 million and was the result of economic and commercial realities, not to any wrongdoing on the Company's part.
Subsequently, in 2009, original Allyes management, including the president, COO, CTO among other key employees, left Allyes to start other ventures, which further negatively affected the business and prospects of Allyes, resulting in a much lower valuation of the enterprise and the resultant impairment charge. This resulted in the second impairment charge of US$37.4 million in 2009.
In early 2010, while Focus Media was attempting to convince the remaining Allyes management to remain, the Allyes team wanted to receive free shares, whereas FM management wanted the group to invest in shares of Allyes on the basis of the US$35 million valuation based on an independent valuation performed in 2009. In order to convince the Allyes team to invest, the FM CEO and CFO put forward their own capital to show their confidence in Allyes and in the valuation, and thus successfully incentivized the Allyes team to invest in the enterprise and commit to its success. Further, in June 2010, an independent third-party valuation firm appraised Allyes at $38 million.
The transaction was approved by all independent directors and included due consideration of a fairness opinion issued by an investment bank.
Hua Guang Chuanzi OOH (“OOH”)
The Report further alleges that the transaction involving OOH improperly benefited insiders. The Company vehemently denies such allegations. The Company purchased OOH at a valuation of approximately US$47.4 million, and additional management bought into the entity at a much higher valuation of approximately US$70 million. The reasons for management's participation in the transaction is similar to the Allyes situation: existing employees would not have remained had Focus Media management not made a commitment of their own funds to the transaction, at a price significantly higher than that paid by Focus Media in the first instance. For the nine months ended September 30, 2011, we recorded cumulative net profit of US$0.3 million from the OOH business.
False allegation that the Company did not enter into certain acquisitions
The Report alleges that six handset advertising companies Focus Media (the "Six Handset Entities") acquired never occurred. The claim is false and misunderstands how those transactions were structured.
The Company has historically maintained a variable interest entity, or VIE, structure of ownership of its various PRC-based businesses. The VIE structure enables an offshore listed company, such as Focus Media, to consolidate the onshore businesses through a series of control agreements among various entities and the individual shareholders of the onshore entities.
The Six Handset Entities were acquired in a way that utilized the VIE structure, so that Focus Media took control of those entities without the share ownership of the onshore PRC entities ever changing hands. Accordingly, even though the nominal shareholders of the Six Handset Entities remained unchanged, and no change in shareholders would be found when conducting public searches. In addition, as the Ministry of Information Industries mandates that each company may only have a single value-added telecommunications, or VAT, license, Focus Media left the VAT licenses registered under the entities as acquired to ensure that each such acquired entity could continue to operate independently.
In sum, the VIE structure of these acquisitions was made through contractual arrangements there were clearly disclosed. The VIE structure and the need to maintain the VAT license under the registration of the original companies mean that no registrations or filings were made that would have shown a change in share ownership. The changes in control were achieved through contractual arrangements. The claim that these acquisitions never took place is without foundation and reflects a failure to understand the regulatory and legal framework applicable to companies operating in China.
The Report misinterprets numbers and financial data
The impairment charge relating to the boat and related assets is incorrect as is the reason the Report cites for the impairment. The reason for the impairment for ZHPY was a result of regulatory changes as a result of the Shanghai 2010 World Expo where the government decided to no longer allow boat advertising. The impairment amount relating to ZHPY cited in the Report impairment of $36.9 million is not accurate. The total acquisition cost for ZHPY was $5.1 million, all of which were allocated to intangible assets (i.e. operating and broadcasting rights). In addition, it cost the Company approximately $11 million in building the boat and the LED displays. The total impairment loss associated with ZHPY was $12.7 million.
The Report either misstates and misunderstands specific operating data and numbers or makes allegations that question the motives and business judgment of management. The Company will take all necessary legal measures to defend itself against these charges and to protect the interests of shareholders. In addition, the Company expects that the audit committee will independently look into these charges and take appropriate action, as it deems necessary, in response to them.
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