Carlyle bids for Focus Media's delisting

US buyout fund Carlyle Group and some of China's top private equity funds are targeting the biggest ever delisting of a New York-listed Chinese company, attempting to privatize a firm directly targeted by shortseller Muddy Waters.

The offer is the latest, and biggest by some distance, in a string of attempted management-led buyouts by US-listed Chinese companies, whose reputation among US investors has suffered after a series of alleged accounting scandals.

Carlyle, the world's biggest fund by assets, FountainVest Partners, CITIC Capital Partners, CDH and China Everbright are backing a proposed $3.5 billion delisting of display-advertising firm Focus Media Holding Ltd, working with the company's chief executive.

Private equity funds have been picking over hundreds of China firms listed in the United States, looking for viable takeover targets, but until now the deals have all been below $1 billion, largely because of difficulties getting financial backing.

"Where these firms have often struggled with the delisting process is in getting financing to back them," said Paul Boltz, partner at law firm Ropes & Gray, which has worked on a number of take-private transactions.

Funding for buyouts of Chinese companies is done through an offshore holding company, but many banks cannot lend on such deals due to the risk of non-payment. Banks have to get comfortable with the risk that the firm will make enough revenue to pay its debt, that it will pass on the funds to the holding company, and that Chinese regulators will sign off on the transaction.

Citigroup, Credit Suisse and DBS Bank are backing the Focus Media deal, and have asserted they are highly confident of underwriting a financing.

Ropes & Gray estimate that 11 China firms have so far been delisted from the United States, while a further 17 including Focus Media are now in the process of attempting to delist. Four companies attempted to delist but then cancelled, including Puda Coal.

Focus Media shares, which peaked above $66 in 2007, jumped 8 percent to $25.26 on the bid, but were still short of the offer price of $27 per American depositary share.

Short selling

Shanghai-based Focus Media -- which operates advertising screens in offices, elevators and supermarkets across China -- has faced persistent allegations from short-seller Muddy Waters that it overstated its assets and overpaid for acquisitions.

Its stock fell 40 percent in a day last November after a Muddy Waters report, which the company said did not take into account its digital screens and LCD picture frame devices.

In January, the firm denied further allegations about irregularities in the purchase of a ginseng plantation.

"Focus Media is under a lot of valuation pressure because of controversies surrounding the company," said T.H. Capital Research analyst Tian Hou, adding that a successful deal would help other Chinese companies regain credibility among US investors.

The Focus Media deal triggered a 7 percent jump in shares of New Oriental Education & Technology Group Inc, which Muddy Waters has accused of lying about its network and cash balances.

Muddy Waters founder Carson Block welcomed the offer, telling Reuters: "The markets are far better off if a few deep-pocketed investors own Focus Media instead of mutual funds and other public shareholders."