Carlyle bids for Focus Media's delisting

Buy-outs increasing

The increased scrutiny on US-listed Chinese firms has depressed their share prices and encouraged management buy-outs to take advantage of big discounts to peers on the Hong Kong and Chinese stock markets.

The deals, known in banking circles as "take China privates" have so far been relatively small, but history shows that for private equity there is high upside potential.

Morgan Stanley Private Equity's delisting of Sihuan Pharmaceutical Holdings Group Ltd is regularly cited as an example of returns that can be made with the right target.

MSPE took Sihuan private in Singapore in 2009, identifying a company that required no additional work before relisting in Hong Kong in October 2010. The stock jumped 28 percent on its IPO, with top-end pricing valuing the company at 26.7 times 2011 earnings.

In the past year, Harbin Electric, Chemspec International and China Fire & Security have all been delisted from the United States, by Abax Global Capital, Primavera Capital and Bain Capital respectively.

Fushi Copperweld Inc, China TransInfo Technology Corp and Winner Medical Group Inc are among many that have accepted take-private offers from their managements but are yet to complete the privatization process.

Shares of Focus Media trade at a multiple of 8.3 times their forward earnings, a deep discount to its five-year historical average and the industry average, according to Thomson Reuters StarMine.

"We think the (Focus Media) stock has been undervalued trading at high single-digit PE when the earnings growth is expected to be above 20-25 percent," Macquarie Securities analyst Jiong Shao told Reuters.

"Focus Media has a great business, generates tons of cash, pays dividend and buys back its shares."

The company's board has formed a committee of independent directors to consider the offer. Chief executive Jason Nanchun Jiang held about 18 percent of the outstanding shares as of December 31, according to the company's annual report. He bought $11 million of the company's ADSs in November.