The LCD screens found in the lobbies of commercial and residential buildings across the country have gone dark – at least in a manner of speaking. Focus Media (FMCN.O) agreed to sell its out-of-home advertising business to web portal Sina (SINA.O) for US$1.4 billion in Sina stock in late December.
It might sound odd that a company would sell such a core asset – Focus has a 90% share of the out-of-home market – but analysts say the reasoning was sound. Investors had lost faith in Focus due to missteps over projected earnings disclosures, while LCD screens are facing a backlash from property owners, undermining their effectiveness.
The sale allows Focus to concentrate on its internet business. Its Allyes internet advertising unit has a 95% market share. Focus also has interactive agencies that buy ad space on sites such as Sina, Sohu (SOHU.O) and Tencent (700.HK).
That combination makes Focus a strong prospect as a strategic partner for companies such as Baidu (BIDU.O), Google (GOOG.O), Microsoft (MSFT.O) or Alibaba (1688.HK) without hurting Focus’s agency business, since it does not provide content, said Jason Brueschke, managing director and regional head of internet & media research at Citi in Hong Kong.
Brueschke upgraded Focus from "Hold" to "Buy" in response to the deal, as he felt the assets were being undervalued. Five of the nine analysts surveyed by TheStreet.com had "Hold" ratings on Focus as of mid-January.
Why was Sina such a willing suitor? Though the leading Chinese web portal by ad revenue, Sina had been looking to diversify its offerings to better compete with Sohu and Tencent, which also offer online games and instant messaging services, respectively, said Lucy Fu, senior analyst in digital media for JL McGregor & Company.
Going large
The acquisition allows Sina to become a bigger player in digital media and gain more of a client’s advertising budget instead of just the internet portion.
However, scale and the integration of the two businesses is an issue for Sina, said Normandy Madden, editor of AdAgeChina.com. "It’s a minnow buying a whale. It’s a lot bigger and more complex than what they’ve been doing," she said.
Despite possible difficulties, Fu expects to see more mergers in the first and second quarters of 2009. Many smaller media firms have been waiting to go public in recent years. Now, with no way to access funds, they could become acquisition targets.