China Mass Media merger arb

While looking at what happened with some companies that I had researched in the past I stumbled once again on China Mass Media Corp (CMMCY.PK). In my original write-up I noted how it would make a lot of sense for the CEO to take the company private. China Mass Media paid a huge dividend in December last year, giving the CEO who owns around 75% of the outstanding shares more than 43M in cash while the market cap of the company at that time was just 4.5M, and since he already owns 75% he doesn’t need a lot of cash to buy the remainder.

Not long after publishing my write-up the CEO did indeed propose to take the company private for $5 per ADS and a merger agreement was filed with the SEC earlier this month. The merger is expected to close in the fourth quarter this year, and to make things simple, lets assume that it will take exactly three months from today. With the latest trade price at $4.76 and a 1% ADS cancellation fee the merger offers a possible return of 4.0% or an IRR of ~16.9%.

It’s not an extreme return, but for a merger that does not have financing risk or regulatory risk that doesn’t seem bad. And with the CEO already owning 75.4% of the outstanding shares there seems to be little that could stand in the way of a successful transaction. The CEO can unilaterally approve the merger, and a “majority of the minority” provision is not required under Cayman Islands Law. The minority is not completely without rights, but for the details: check the merger agreement.

Obviously there was a reason why I didn’t buy China Mass Media Corp when I first researched it, so why consider it again? My problems with CMMCY.PK were mostly related to the IPO because in case of a fraud that’s where you are making the money. The big dividend was already a solid clue that CMMCY.PK has a real business with real cash, and think the CEO’s offer and the subsequent merger agreement are pieces of new information that make it less likely that CMMCY.PK is a fraud. I would still not be convinced that the CEO is acting in the best interest of shareholders, but unfortunately that’s often the case, and in case of a merger arbitrage you don’t need to. You just need to merger to complete, and seems to me that this is almost certain to happen.

Disclosure

Long some CMMCY shares

4 thoughts on “China Mass Media merger arb

  1. rijk

    the agreement does not provide strong incentives for the buyer to close the deal, the reverse termination fee is only $100k (1%) and there doesn’t seem to be the option of demanding specific performance

    Reply
    1. Hielko

      Buying a business for a good price should be plenty of incentive for the buyer. I actually considered the lack of termination fees as a positive: otherwise the transaction could also be used as a way to transfer cash out of the company. Now the only possible motivation for lauching the offer can be that he wants to buy the business.

      Reply
  2. pietje

    So you only get 4.95 effectively. I also am not sure whether you have to pay stamp duty or stock transfer taxes. Anyway, yesterday some shares traded @ 4.68 still making it a decent trade.

    Where did you find that the deal was expected to close in Q4? Can’t find that anywhere in the prospectus.

    I agree that a termination fee doesn’t really make sense if the CEO wants to take the business private.

    Reply
    1. Hielko

      It’s in the Q&A section of the merger agreement: “We are working toward completing the merger as quickly as possible and currently expect the merger to close in the fourth quarter of 2012. In order to complete the merger, we must obtain shareholder approval of the merger at the extraordinary general meeting and the other closing conditions under the merger agreement must be satisfied or waived, as permitted by law.”

      As far as I figured it out you only need to pay 1% ADS cancellation fee, but as always I could be wrong…

      Reply

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