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China Mass Media Merger Arb: 4.0% Gain in 3 Months

September 17, 2012 | About:
AlphaVulture

AlphaVulture

11 followers


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


Rating: 3.0/5 (3 votes)

Comments

tonysf
Tonysf - 2 years ago


Well, from Morningstars data, it seems to me that this company raised 288 million RMB in 2008 from the IPO. Over the years, it spent very little on capex (between 3 to 33 million RMB a year). And in 2009, and 2011, it paid dividend of 98 and 198 million RMB, respectively. Over the years, it has very little net income (but positive) and the total cash flow from operation from 08 to 2011 is tiny.

You can look at the M* data here http://financials.morningstar.com/cash-flow/cf.html?t=CMMCY®ion=USA&culture=en-us

I can't tell if it is involved in fraud but it seems like the CEO simply transfered the cash raised from IPO to his own wallet. No shareholder value was ever created. Well, one can say that there is nothing wrong with that because that is one way to cash out by the way IPO + dividends. To me, why waste time (and why take risk) with investment like this.

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