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Monday, December 29, 2008

Chinese Web Portal Ventures Into Out-of-Home Ads

As posted by: Wall Street Journal

HONG KONG -- Sina Corp. agreed to acquire the core operations of China's largest digital-advertising company for more than $1 billion in stock, a risky move by one of the country's oldest Internet companies to expand into offline advertising.

Sina, founded in 1999, operates China's most popular Web portal by advertising revenue. Under terms of the deal, Shanghai-based Focus Media Holding Ltd. will sell Sina its nationwide network of hundreds of thousands of flat-panel displays that play video ads in places like stores and office-building elevators.

Sina will also acquire related ad businesses, which together accounted for about 52% of Focus Media's revenue and about 73% of its gross profit in the first nine months of the year, the two companies said Monday.

Sina said it will issue 47 million new shares to Focus Media for distribution to its shareholders. The size of the issue is close to the roughly 56 million shares Sina had outstanding before the deal, according to the Nasdaq Stock Market. That means significant dilution for existing Sina shareholders.

The 47 million shares would be valued around $1.37 billion based on Sina's closing share price Friday. The market value for all of Focus Media was $1.42 billion at Friday's close. After the announcement Monday, Sina's shares were down 18% at $24 in late-afternoon Nasdaq trading. Focus Media's shares were off 17% at $9.12, also on the Nasdaq.

The deal size highlights the growing muscle of Internet companies in China, which by some measures boasts the world's largest population of Internet users.

Sina and its Chinese peers remain relatively small compared with their U.S. counterparts, but they are expanding quickly thanks to strong growth in online ad spending. Sina last month reported a 64% increase from a year earlier in its third-quarter revenue to $105.4 million.

Sina hopes the acquisition of the digital out-of-home business will create the "dominant new-media advertising platform in China," which will cover "a significant portion of mainstream urban consumers in the China market," Sina Chief Executive Charles Chao said in a conference call.

Analysts voiced skepticism, despite the possibilities for cross-selling advertising across platforms.

"There is synergy in the sense you've got an integrated platform that could be a powerful new platform for media buyers and advertisers," said Vivek Couto, an analyst with Media Partners Asia. "However it depends on how integrated it's going to be."

Founded in 2003, Focus Media grew quickly thanks to its widespread digital-ad displays and to a series of acquisitions. But in the past year its share price has plunged by more than 80% as investors started doubting its business model and its founder resigned as chief executive.

Focus Media said it plans to keep its Internet-advertising division, movie-theater advertising network and certain traditional billboards after Monday's deal.

Shaun Rein, head of Shanghai-based China Market Research, said the steady growth of companies like Sina was posing a challenge to Focus Media, because companies have increasingly switched away from its ad displays in favor of advertising online.

Dick Wei, an analyst for J.P. Morgan, questioned whether Sina will be able to use Focus Media's networks effectively. "The idea of a 'media conglomerate' has not worked well in China," Mr. Wei wrote in a research note after the deal was announced.

Focus Media's "original plan of cross-selling between Internet, in-store and elevator lobby business has not shown much success."