Charm Communications raises $74.2 million in US IPO

Despite the widening government-debt crisis in Europe and as many as eight initial public offerings crowding the US exchanges this week, a small deal out of China sailed through the US primary markets, putting a spell of charm on cautious investors.

Charm Communications, a Chinese television advertising agency, raised $74.2 million in a Nasdaq IPO after pricing its shares towards the bottom of the indicated range -- a move designed to increase the potential for gains in the secondary market.

Initially, the company's generosity seemed to have worked. The stock opened higher when it started trading last night under the ticker "CHRM", and climbed as much as 5% to $10 early in the session. However, after trading above issue price for most of the day, it eventually failed to withstand the widespread collapse in share prices and finished its first day 10 cents down at $9.40. The Dow Jones index fell 0.55%, while the Nasdaq Composite index lost 0.9%.

The Beijing-based company sold 7.8 million American depositary shares (ADS), each representing two class-A ordinary shares of the company, at $9.50 apiece -- near the bottom of a $9 to $11 indicated range.

The IPO price translated into a 2010 price-to-earnings ratio of 10.7 times. That represented a significant discount to Nasdaq-listed Focus Media, Charm Communications' bigger competitor in China, which at the time of pricing was trading at 20 times its projected earnings this year, bankers familiar with the deal said.

Another Nasdaq-listed Chinese media company -- VisionChina Media -- trades at 13 times its forecast earnings for 2011, one banker said.

The price ended up at the lower end since the market backdrop made investors very cautious. They were also concerned about the company's business model and how it is going to sustain its growth by getting hold of heavyweight TV stations in China, sources said.

Given the small size of the transaction, there were no cornerstone investors in the deal. The offering was five times covered by institutional investors, according to sources.

The deal comes with a 15% greenshoe option which could allow the company's shareholder Merry Circle Trading to sell an additional 1.2 million ADS to cover excess demand.

Credit Suisse acted as the sole bookrunner for the offering.

The company's revenue grew 8.4% in 2009. However, aggressive expansion aimed at increasing its market share in the world's fastest-growing economy weighted on Charm's net earnings during the year and its profit declined 17%. But the investments have started to pay off; revenue jumped 75% and its profit was up six-fold in the first quarter of this year, according to the IPO prospectus.

Charm Communications, which claims to become China's largest domestic television-advertising agency, plans to use the proceeds from the IPO to fund its expansion. It will acquire advertising media resources on television channels and new media platforms for its media investment-management business, the company said in the prospectus.

The company places advertisements for clients on an array of television channels, including China Central Television and satellite and regional television channels, and, on a smaller scale, on other media platforms such as internet and outdoor media, it said.