http://www.wsj.com/articles/focus-medias-backdoor-china-listing-hits-snag-1434618919

Focus Media’s Backdoor China Listing Hits Snag

Shell company Jiangsu Hongda New Material being probed by regulators

SHEN HONG

June 18, 2015 5:15 a.m. ET

SHANGHAI—Chinese outdoor-display-advertising firm Focus Media Holding’s plan to float shares inside China has hit a snag after the shell company used for its backdoor listing said it is being probed by regulators. In a filing to the Shenzhen Stock Exchange dated Thursday, Jiangsu Hongda New Material, the target of Focus Media’s proposed so-called “reverse merger”, said the China Securities Regulatory Commission has launched investigations into Hongda and its controlling shareholder, Zhu Dehong.

The deal had been closely watched as one of the first of many Chinese companies that delisted from the U.S. to go public in China, where the recent stock boom has buoyed valuations.

Hongda said the probes are due to allegations that the company’s information disclosure has breached Chinese securities law and regulations as well as those that Mr. Zhu has violated the securities law and regulations as well.

Hongda didn’t give other details on the probes.

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Hongda said it is still holding talks with related parties for the proposed “asset restructuring” with Focus Media.

Focus Media, which delisted from the U.S. two years ago, has sought to return to its home turf by what is known as a reverse merger. In such deals, a private company merges with a publicly traded one to gain access to capital markets.

In the case of Focus, that company is Hongda, which makes the materials used to produce rubber gloves, among other products.

The backdoor listing values Focus at 45.70 billion yuan ($7.38 billion), nearly twice the $3.87 billion that the company was valued at when it was taken private in May 2013 by founder Jason Jiang and a group of investors including private-equity firm Carlyle Group LP and several Asian firms, in the largest-ever leveraged buyout of a Chinese company.

Hongda, which has a market value of $623 million, said in a filing to the Shenzhen Stock Exchange earlier this month that it is buying out Focus Media using a mix of shares, cash and other assets. It added that its shares were suspended from trading on Dec. 10 and will resume trading no later than June 9, with Focus Media as part of its operations.

The buyout plan comes a month after Focus Media’s investors—Carlyle, Hong Kong-based Fountain Vest Partners, China’s Citic Capital Partners, and mainland companiesFosun International Ltd. and China Everbright Investment Management—sold part of their stake to 36 Chinese investors in a transaction that valued the Chinese ad company at about 45 billion yuan.

The new Focus Media, or Hongda, will count Mr. Jiang as its largest shareholder, owning 24.7%. Carlyle and the rest of the buyout consortium will own about 34%.

In its filing earlier this month, Hongda said it plans to raise up to 5 billion yuan to finance the deal through a private sale of stock, in which shares are sold to no more than 10 investors. The deal is awaiting approval by the CSRC.

Focus had assets of 8.85 billion yuan at the end of 2014. It net profit rose to 2.42 billion yuan last year from 1.34 billion yuan in 2012, according to the filing.