Shareholders of Focus Media Holding Limited (ADR) (FMCN) and SINA Corporation (USA) (SINA) were met with a surprise this Monday.  The boards of both companies have agreed to a transaction whereby Focus Media will sell the majority of its LCD display network, its poster frame network, and its in-store network to SINA.  In return for these businesses, Focus Media shareholders will receive 47 million shares of SINA Corporation.

Now if you’re like me, your immediate thought is “what is left of Focus Media?”  The trite answer would actually be “not much.”  According to the press release, the businesses in question account for 52% of Focus Media’s revenue and about 73% of gross profits.  (This is calculated using the last nine months of reported data).  Focus Media will be left with their Internet advertising network, their movie theater advertising, and certain traditional billboards.  These businesses are still profitable, but are simply not what FMCN shareholders owned the stock for.

Despite feeling a bit frustrated at losing what I considered to be a good growth opportunity (I’m not all that excited about owning SINA shares yet), some of the specific terms of the transaction are quite interesting.  According to the release, the SINA shares received will not be held on the balance sheet of Focus Media.  Instead, shortly after the transaction closes, these shares will be distributed to FMCN shareholders.

Since my background includes a bit of work for a risk-arbitrage hedge fund, I was immediately compelled to “do the math” on the transaction, and was a bit surprised at what I came up with.  There are currently 128.6 million shares of FMCN outstanding and SINA is paying for the transaction by issuing 47 million shares.  That equates to roughly 0.365 shares of SINA for each share of FMCN.  Using the SINA closing price of $23, and assuming that each share of FMCN will receive 0.365 shares, the actual value of the SINA payment comes t o $8.40 per FMCN share.  So this implies that the rest of FMCN’s business is only worth $1.20 per share.  That seems a bit low for the remaining business which still produces 27% of gross profits.

So the arbitrage play would be to buy 100 shares of FMCN assuming that you are going to get 37 shares of SINA distributed to you.  You could short 37 shares of SINA now which is essentially selling those shares that will be given to you.  The difference in purchase price for the FMCN and the proceeds from the SINA sell should be roughly $1.20.  So once the transaction is complete, your SINA shares are distributed and paired off against your short position, you will be long 100 shares of the remaining FMCN stock with a cost basis off $1.20.  Its not a risk-less play, but it certainly seems that this sets up a very good value for owning what is left of Focus Media.

This current market environment requires a bit more creativity in finding returns and managing risk.  Situations like Focus and SINA give us a chance to make profits in a less traditional manner.  So investors willing to think outside the box and look closely at such non-traditional transactions may have an upper hand over the coming months and years.

Special thanks to reader Boris B for pointing this transaction out to me.

FMCN Notes
FD: Author does not have a position in FMCN or SINA

Additional Reading:
WSJ: Chinese Web Portal Ventures Into Out-Of-Home Ads
Tech Trader: SINA Plunges after FMCN bid