Focus Media will buy 100% of CGEN, paying $168.4 million in cash and up to $181.6 million in cash and Focus Media shares. Focus Media shares have been valued at $53.42 per ADS, with each ADS representing five Focus Media shares. The second tranche of the payment is contingent upon CGEN meeting pre-defined earnings targets over a two-year period after the deal closes.
CGEN operates an in-store television advertising network in China, inside large-format retail chain stores, such as hypermarkets and home-improvement superstores. As of October 2007, CGENÆs network covered 534 stores across 65 cities in China including Guangzhou, Shanghai, Beijing and Nanjing.
CGEN has exclusive contracts with global chains Carrefour and Century Mart, regional chain Wu-Mart, and with the B&Q Stores. These four retail chains together accounted for 39% and 75.5% of CGENÆs total rental fees for 2005 and 2006, respectively. In September 2007, CGEN entered into a three-year contract to deploy its network in 100 Wal-Mart stores in China. These relationships with leading retailers make CGEN valuable to Focus Media.
CGEN is similar to Focus Media in that it derives its revenues from the sale of advertising airtime and from organising in-store promotional events for retailers and advertisers. In 2006, it had revenues of $20.8 million, and in the first six months of 2007 it had already recorded sales of $18.7 million. CGEN had a net loss of $0.6 million in 2006 and earned a net profit of $7.2 million in the first six months of 2007.
Focus Media already operates the largest out-of-home advertising network in China using audiovisual digital displays, based on the number of locations and number of displays. It also provides mobile handset advertising and internet marketing solutions in China. The deal expands Focus Media's existing coverage of its digital advertising displays in large chain stores in China.
Focus Media said the deal values CGEN at 17.5 times its expected 2008 US GAAP earnings with certain adjustments and that it expects the deal to be earnings per share accretive excluding any amortisation of intangibles.
On a trailing basis, the deal is aggressively priced. At $350 million it values CGEN at 17 times 2006 sales. But, as with companies of this ilk, CGEN is growing aggressively. If CGEN's first six months of 2007 sales are extrapolated to the full year, the deal values the target at nine times 2007 sales.
Focus Media will issue new shares for the stock payment to CGEN.
CGEN has raised three rounds of venture capital funding since 2005. Among its investors at various stages over the three rounds are SITV, Sumitomo Capital Asia, Jafco Asia, TDF Capital, Hotung Investment Asia, Merrill Lynch and Redpoint Ventures.
In November, CGEN filed for a Nasdaq IPO. The company was planning to raise about $100 million of fresh equity to fund its expansion and some existing shareholders were simultaneously going to cash out. It now seems that the IPO was aborted pending discussions with Focus Media.
Focus Media shares gained about 4% on Nasdaq to close at $57, confirming that - whatever the pricing - investors are positive about the news that Focus Media continues to consolidate its position via acquisitions.
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