Tag Archives: CMMCY.PK

China Mass Media transaction completed

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The going private transaction of China Mass Media went without any problems. The merger was approved on October 31 and the payment for my shares should follow soon. The absolute return on this position is just 4%, but since it was completed after just ~1.5 months the annualized return is roughly 35% (depends a bit on when I’m paid). That’s pretty solid.

Hopefully we will see a similar fast deal completion with my other Chinese going private position (China Nuokang Bio-Pharmaceutical) that is scheduled to be completed in Q1 2013.

Disclosure

Long CMMCY and NKBP

China Mass Media merger arb

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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

China Mass Media (CMMCY.PK)

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A reader pointed me in the direction of China Mass Media (CMMCY.PK), another Chinese company that’s trading for less than the cash on the balance sheet. The company paid a special dividend of $22.98/share at the end of December last year (an amount almost equal to the share price the previous day) and was delisted from the NYSE two weeks ago because the market cap of the company was insufficient (below $15 million over a 30 day period). Even though the company paid a total of $57.9 million in the special dividend there is still plenty of cash on the balance sheet:

Last price: 1.80
Shares outstanding (ADS): 2,505,659
Market cap: 4.5M
Cash and Equivalents (mrq): 17.7M
P/E (ttm): 1.9x
P/B (mrq): 0.19

Is it real?

As is the unfortunate case for Chinese companies listed in the US the biggest question that needs to be answered first is “is it real?”. As discussed in my post on DSWL the only way to be sure that a company is not a fraud is to see that’s returning more money to share holders than that it has raised in the equity or debt markets. So the big dividend is a clue that the company might be real, but we do need to take a closer look at the past.

The company became public using an IPO of ADS shares (sold 7.2M shares at $6.8, raising $42 million after fees). The IPO was used to raise cash to invest in the business, and diluted the ownership of the CEO from ~100% to 70%, and that percentage has remained roughly constant to this date (it’s up a bit due to option grants and some share buybacks). So this also looks good, but it’s important to realize that the company did not pay out more in dividends than it raised in cash in the IPO. Since the CEO owns around 75% of the shares today just 14.5M was returning to outside investors in the dividend.

With the market cap of the company currently at 4.5M, and the CEO receiving ~43M in dividends it’s easy to imagine a positive scenario where the company is taken private at a nice premium to the current share price.

So I think the bull case is clear, but at the same time while just scrolling through the IPO prospectus and the annual reports there are all kinds of weird things I’m not comfortable with. Some examples:

  • The company originally tried to IPO at a significantly higher price, but after failing to do so it had no problems accepting a lower price (raise money at any cost?).
  • The ADS structure seems to be weird to me since the underlying shares aren’t traded anywhere
  • The company used an IPO to raise cash for the business, but why do this while paying dividends?
  • The company stated in the IPO prospectus that it intended to (continue) to pay regular dividends, but failed to do so after the IPO.

Or something like this:

Subsequent to the issuance of the shares, on June 24, 2008, the existing shareholders controlled by Mr. Shengcheng Wang entered into investment agreements with a group of third parties and sold the Preferred Shares at USD 60 million.

[…]

On July 23, 2008, the existing shareholders controlled by Mr. Shengcheng Wang entered into an agreement to repurchase all the Preferred Shares for USD 60 million plus one month of interest at an annual rate of 8.0%. None of the repurchase cost was borne by the Company.

How does this make sense?

Conclusion

China Mass Media does have some interesting things going for it, but to quote Buffet:

In this game, the market has to keep pitching, but you don’t have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch.

No reason to swing the proverbial bat when just at first glance there are things going on I don’t like, especially not when we are talking about a company in China.

Disclosure

None