{ "docId": "019dd923-622c-750b-8b95-e976ef3dfa16", "docSlug": "7f8b05d541c7", "documentTitle": "Focus Media Holding Ltd. (FMCN)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2011-11-21 00:00:00", "orientation": "portrait", "aspectRatio": 0.7070758, "pageNumber": 12, "pageCount": 80, "prevPage": 11, "nextPage": 13, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 12, "notes": "The slide uses a narrative structure to expose corporate governance failures and potential self-dealing by FMCN management.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b95-e976ef3dfa16/12", "deckHref": "/decks/019dd923-622c-750b-8b95-e976ef3dfa16", "deckJsonHref": "/decks/019dd923-622c-750b-8b95-e976ef3dfa16.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b95-e976ef3dfa16#slide-12", "components": [ { "bbox": { "h": 0.03, "w": 0.72, "x": 0.14, "y": 0.26 }, "kind": "callout", "text": "Overpaying for Allyes When Sellers Include FMCN Insiders (See “All(Directors Say)Yes to Enriching Insiders”)", "attrs": null, "subkind": "primary", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "30e82bd6-066c-4f48-8057-0f6b24d836a1", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.72, "x": 0.14, "y": 0.44 }, "kind": "callout", "text": "Massively Overpaying for a Failing Direct Competitor (See “FMCN Acquires a Direct Competitor and Loses $198.4 Million in 11 Months When Bizarre Business Plan Fails”)", "attrs": null, "subkind": "primary", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5f0c2bae-c2e4-48d5-a2db-7de1cf6adb56", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "callout", "text": "It is clear that FMCN did not effectively manage the conflict of interest inherent in this purchase.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-14d7-73fd-9f5b-4d13bdb7ced2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.72, "x": 0.14, "y": 0.07 }, "kind": "paragraph", "text": "RMB one million, which the agreement allocates as consideration for ZHPY’s registered (i.e., paid-in) capital, and RMB five million as a reserve against potential litigation damages.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0c7711c7-2866-48d6-93cc-a0fb34070580", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.72, "x": 0.14, "y": 0.66 }, "kind": "paragraph", "text": "FMCN’s CGEN-esque Business Plan for Small Internet Acquisitions Fails to Enrich Shareholders, but Helps Related Parties", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "31c48bfa-61b0-401a-8710-6bb61a2a4f2b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.72, "x": 0.14, "y": 0.48 }, "kind": "paragraph", "text": "FMCN bought its direct competitor in the in-store network space, and wrote the entire acquisition off within 11 months. As part of the purchase agreement, FMCN agreed to repay $30.0 million of CGEN’s outstanding debt. The need for the loan in an asset lite business was a clear sign that CGEN had serious issues.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5af89662-97fc-438a-bcea-2031cec583a9", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.09, "w": 0.72, "x": 0.14, "y": 0.55 }, "kind": "paragraph", "text": "FMCN’s purported rationale in paying richly for CGEN is that after the acquisition, CGEN’s landlords would be amenable to renegotiating CGEN’s existing leases to allow for lower lease payments. CGEN’s landlords were hypermarkets, such as Carrefour, and are significantly larger in China than the combination of FMCN and CGEN. We are skeptical that FMCN management was really unsophisticated enough to risk in good faith this much money on a company and turnaround plan this shaky.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a0b57d3c-1b64-4867-a92c-284680807f4c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.72, "x": 0.14, "y": 0.21 }, "kind": "paragraph", "text": "Also of note, FMCN acquired the Captain Six for at least $12.4 million after buying ZHPY. We estimate that the Captain Six should have cost no more than $3.9 million.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "af9951ac-1022-42c6-8e36-3b090351b3cf", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.72, "x": 0.14, "y": 0.12 }, "kind": "paragraph", "text": "Only four months prior to selling ZHPY to FMCN, ZHPY’s then-shareholders had agreed to sell 90% of ZHPY to another buyer for only $3.3 million. In selling ZHPY to FMCN, the sellers faced a possible breach of contract claim, and thus the litigation reserve. Importantly, the would-be buyer did sue, and the ensuing litigation establishes the agreed upon sale price of $3.3 million for the 90% stake of as fact.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b47aeadb-e001-46a3-9f5c-972d5e8f5aaa", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.72, "x": 0.14, "y": 0.3 }, "kind": "paragraph", "text": "FMCN bought Allyes from a group of shareholders that included FMCN board member Neil Shen, the omnipresent Xiong Xiaodong, and likely also chairman / CEO Jason Jiang for a total of $296.9 million. We estimate that this purchase put at least $7.4 million in profit into the aforementioned individuals’ pockets. FMCN shareholders did less well when FMCN subsequently impaired Allyes to $78.5 million. FMCN eventually sold Allyes at valuations ranging from $35.0 million (to insiders) to $200.0 million (to a venture capital firm). It is clear that FMCN did not effectively manage the conflict of interest inherent in this purchase.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f5c14fda-6b50-4060-954b-bd9b6f611899", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.25, "x": 0.14, "y": 0.72 }, "kind": "source-note", "text": "59 2009 Q1 6-K filing\n60 See Shipwrecked\n61 2008 20-F, p. 65", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "c468856b-a41b-4153-a668-0de0d4420e9f", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 20, "from": 5, "beatId": "f108e478-2bd9-475d-b511-0386bb005a72", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Monster", "beatSlug": "overcoming-monster-the-monster", "evidence": "The report exposes contradictions and misrepresentations in FMCN's financial reports", "position": 1, "confidence": 0.8, "parentBeatName": "Hook", "parentBeatSlug": "hook" } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }