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The Real Reason Carlyle is Buying Focus Media for $3.6B

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Yesterday a big announcement was made about a stock which many people have accused of being a fraud. Focus Media Holding Limited (NASDAQ:FMCN), a Chinese based advertising display provider company, is being acquired by  Carlyle Group LP (NASDAQ:CG) and several other private equity firms. The total amount being paid to take the company private is approximately $3.6Billion.

The Real Reason Carlyle is Buying Focus Media for $3.6B

The firms include CITIC Capital Partners, FountainVest Partners, CDH Investments, and China Everbright Ltd. The company’s CEO, Jason Jiang, is also part of the buyout. the Chinese based company has been accussed by Muddy Waters of having some strange accounting issues.


Muddy Waters’ main points are listed below (click here for the full report):

Muddy Waters rates Focus Media Holding Limited (NASDAQ:FMCN) shares a Strong Sell because of significant overstatement of the number of screens in its LCD network and its Olympus-style acquisition overpayments. The $1.1 billion in write-downs from its acquisitions exceed one-third of FMCN’s enterprise value, making FMCN’s acquisitive behavior more destructive than Olympus’s to shareholder value. FMCN insiders have sold at least $1.7 billion worth of stock (two-thirds of FMCN’s enterprise value) since FMCN’s IPO. At the same time, the insiders and their business associates further enrich themselves by trading in FMCN assets, while costing FMCN shareholders substantial sums of money.

  • FMCN has been fraudulently overstating the number of screens in its LCD network by approximately 50%. This is similar to
    China MediaExpress Holdings Inc (PINK:CCME), which we reported is a fraud on February 3, 2011. We therefore question whether FMCN’s core LCD business is viable.
  • Like Olympus, FMCN is significantly and deliberately overpaying for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005. These write-downs are equivalent to one-third of FMCN’s present enterprise value.
  • Our research shows that FMCN has claimed to acquire, write down, and dispose of companies that it never actually purchased. Investors should be concerned about to where cash actually moved in these transactions, and about the integrity of reported results.
  • FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration. We show that many of these write-downs are not justified. There are several possible nefarious reasons FMCN gives acquisitions away, including doing so may put FMCN’s problems beyond the reach of auditors.
  • Insiders have used FMCN as their counterparty in trading in and out of FMCN subsidiary Allyes, with several individuals earning a total of at least $70.1 million, while shareholders lost $159.6 million.
  • Sales of FMCN shares by insiders have netted them at least $1.7 billion since FMCN went public in 2005.

Neither Carlyle Group LP (NASDAQ:CG), nor any other private equity firms are perfect. They make bad deals all the time. Private equity is not an easy industry, and this author can affirm that personally. However, with so many accusations made about FMCN, the deal seemed strange.

We spoke to some people who did a lot of digging into FMCN’s financial statements, some of them were short the company. We wanted to know why they thought this deal was happening.

We first asked Muddy Waters pr firm, Dukas Public Relations, they declined to comment on the matter.

We found some interesting information on FMCN’s employee, Neil Shen, is on the board of the company. Neil Shen is also the co-founder of Seqouia Capital China Fund. Instead of parrotting Roddy Boyd, check out his excellent post on the topic from December 2011 . But in short, Shen is connected to Focus Media’s prior transactions. Although Sequioa is not involved in this deal, Shen might be, and Sequoia bought shares in FMCN at much lower prices.

Muddy Waters made one statement on the topic in a Reuters article,stating:

The markets are far better off if a few deep-pocketed investors own Focus Media, instead of mutual funds and other public shareholders,”

One very smart hedge fund manager, who has sucessfully shorted many frauds, agreed to comment off the record. He states:

they know these things are fraud by the Guanxi guys, who are making the companies do it to curry favor with the elites.

John Hempton of Bronte Capital points out Carlyle’s strong connections in both China and the USA back in 2011. He specifically mentions the Guanxi, which the hedge fund manager discusses. Here is a brief quote from the article:

“Guanxi” is one of those words proponents claim defies easy translation: something between connections and relationship.  Wikipedia defines it as a personal relationship between people in which one is able to prevail on another to get things done.  Whatever: Guanxi is often sold as the key to doing business in China.

At Private Equity (PE) firms the debate as to which deals to do and what price to pay has been between the Analyst guys and the Guanxi guys – and with the Guanxi guys winning almost every time.  Analysts – when they have reservations about deals – are seldom heeded.

In plain English, Carlyle Group LP (NASDAQ:CG) wants to get in with certain Guanxis for future deals.

We spoke to another annonymous individual who has a great record with shorts. ‘The Long Short Trader’ shorted Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) before David Einhorn made his famous speech blasting the company. He also shorted Sino-Forest Corporation (TSE:TRE) which is now filling for bankruptcy. The long short trader states that the acqusition is political and not economical. He says it is ‘very likely’ that Carlyle is buying FMCN to get access to better deals in China.

Many people were hesitant to provide more detail, even off the record. However, there are only two possibilites: 1. Carlyle thinks FMCN is a great buy, or 2. They have their eyes on further acqusitions in China. We think that the latter seems far more likely.

So yes, it sounds crazy at first, but a private equity firm might be investing billions of dollars into a company which they know is a fraud, in order to catch some bigger fish. We will follow up with anything interesting we see Carlyle doing with other Chinese based companies. We cannot confirm that FMCN is a fraud, nor that the reason stated is true, but we do have suspicisions based on what our sources have told us.

Both Carlyle and FMCN declined to comment.

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