* Agreement reached for $27.50 per American Depositary Share
* Has backing from Chinese and Western banks
* Muddy Waters had challenged the company's financial reporting
Dec 19 (Reuters) - Chinese display-advertising provider Focus Media Holding Ltd said on Wednesday it had agreed to be acquired by a consortium of private equity funds led by Carlyle Group LP for about $3.7 billion.
The deal would constitute a huge leveraged buyout in China, a country famous for its capital controls and other challenges for private equity investors. At least two thirds of Focus Media shareholders must 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 Aug. 10, the last trading day before the 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.
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.
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.
Citigroup and Credit Suisse are the lead financial advisors for Carlyle's consortium.