The coming buyout and delisting of Chinese digital advertiser Focus Media, announced this week, caps off a bad year for US-listed Chinese companies. Focus Media said on Dec. 19 that it had agreed to a $3.7 billion offer from a consortium of private equity funds. It is the latest and one of the largest Chinese companies to delist from US exchanges after a string of accounting scandals in 2011 have all but erased confidence in these mainland companies.
But to borrow a favorite diplomatic phrase of the Chinese government, the deal might actually presage a win-win (and win) situation for China’s domestic stock exchanges, Chinese companies struggling for funding, and private equity investors looking for a way into China.
The move for the Shanghai-based company (which makes ads for electronic screens in elevators, office buildings and grocery stores in China) is proof there could be a third way for Chinese companies to find capital—avoiding unfriendly US exchanges and strict Chinese listing requirements. The almost 400 Chinese companies listed on the New York Stock Exchange and the Nasdaq have seen their share prices plunge over the past two years. New companies have not been welcome: The number of Chinese IPOs in the US has gone from 41 in 2010 to 12 in 2011 and in 2012 there have only been two—YY Inc and flash-sale website Vipshop Holdings.
Foreign private equity funds, stymied by endless Chinese regulations and local competitors, are increasingly using buyouts of US-listed companies as a backdoor into Chinese investments. Foreign investors are restricted from sectors deemed “strategic” by the government and private equity funds operating in China have recently come under more regulation in how they source money in their funds. In terms of size, the Focus Media buyout could prove a breakthrough; until now, take-private deals have mostly been below $1 billion. Other recent de-listings via private equity groups include Shanda Interactive, one of the earliest Chinese internet companies to list and Harbin Electric. Chinese software services provider AsiaInfo-Linkage has a committee reviewing a going-private proposal (pdf, p. 3).
The trend of US-listed Chinese companies going private is likely to continue, especially as an auditing spat between the US and China threatens more companies with delisting. If this is the case, China will see more Chinese companies return home where they may eventually list on domestic stock markets. That should give pent up investor demand more options and also boost the appeal of Chinese stock markets, which have been passed over by major companies who opted to list on the more prestigious US exchanges.
Finally, it’s a win for Focus Media. In 2011, the company was accused of overstating the number of screens in its ad network and also overstating the value of its assets. It was hard work to wrangle together the investment consortium, but in the end the deal is getting done. Focus Media will be bought by a company that will then be partly owned by Focus’s CEO Jason Jiang, one of China’s most famous entrepreneurs. The consortium of investors includes Carlyle and three Chinese banks, among others, who will take on more than $1 billion in debt in the transaction. The deal should be completed in the second quarter of next year.