Display-advertising provider Focus Media Holding Ltd said on Wednesday it had agreed to be acquired by a consortium led by Carlyle Group LP for about $3.7 billion in what would be the largest ever private equity deal in China.
Leveraged buyouts backed by foreign private equity firms have been few and far between in China, a country famous for its capital controls and restrictive regulations. At least two thirds of Focus Media shareholders must now approve the deal.
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.
This did not faze Carlyle and some of China's top private equity funds, which made an offer for the company in August together with the chief executive of the company, Jason Nanchun Jiang.
The offer of $27.50 per American Depositary Share represents a premium of 15 percent over Tuesday's closing price and a 17.6 percent premium over the company's closing price on August 10, the last trading day before a takeover bid was announced.
Focus Media ADSs jumped as high as $26.17 on the news and ended trading on Wednesday up 6.7 percent at $25.52.
"Based on our well-documented conclusions of fraud and self-dealing, investors are clearly better off with Focus Media no longer participating in US capital markets. We note that many pension funds and endowments will presumably be the new owners of this company when the deal closes," Muddy Waters said in a statement.
A spokesman for Carlyle, which counts pension funds and endowments among its investors, declined to comment.
Chinese conglomerate Fosun International Ltd, which together with Jiang owns about 35.5 percent of Focus Media, backs the deal and will become part of the consortium taking over the company once the transaction is complete, Focus Media said.
The consortium also includes FountainVest Partners, CITIC Capital Partners and China Everbright. The deal is expected to close during the second quarter of 2013, Focus Media said.
Focus Media also said on Wednesday it had suspended its previously announced share repurchase program and dividend policy as part of the agreement.
Carlyle, a pioneer of private equity in China with about $4 billion invested in more than 60 deals in the country by last August, is not a stranger to controversy when it comes to financial reporting of the Chinese companies it invests in.
It seized the headlines last year after fraud allegations were levied at China Forestry Holdings Co Ltd and China Agritech Inc in high profile accounting-related cases, dealing a blow to the Washington D.C.-based firm's image. China Forestry's shares are still suspended while China Agritech was delisted from Nasdaq in May 2011.
Private equity funds have been picking over hundreds of Chinese firms listed in the United States, looking for viable takeover targets, but until now the deals have mostly been below $1 billion due to difficulties in getting financial backing.
Funding for buyouts of Chinese companies is done through offshore holding companies but many banks will not finance such deals due to the risk of non-payment.
In this case, however, Bank of America, Citigroup, Credit Suisse, UBS and Deutsche Bank have agreed to join Chinese banks in providing $1.53 billion in debt for the transaction.
"There have been several suspect companies that have gone private with bank support (in China), but entirely from Chinese banks and mostly from a single Chinese policy bank, China Development Bank. This time we see Western Banks. That is a surprising and ominous development," said hedge fund manager John Hempton of Sydney, Australia-based Bronte Capital, who has been blogging prolifically about Focus Media.
Citigroup and Credit Suisse are the lead financial advisors for Carlyle's consortium.
(Reporting by Greg Roumeliotis in New York and Neha Alawadhi in Bangalore; Editing by Saumyadeb Chakrabarty, Phil Berlowitz and M.D. Golan)