Focus Media Holding Ltd. denied allegations from short seller Carson Block, saying a report that drove the shares down 39 percent yesterday reflects a misunderstanding of the company’s business.
Muddy Waters LLC, Block’s firm, said yesterday that Shanghai-based Focus Media overstated the number of television screens in its ad network and may have overpaid for takeovers to mask losses. Focus Media said today that Muddy Waters is attributing “motives to management that are based on innuendo” and that the LCD screen allegations are unfounded, according to a press release distributed by PRNewswire today.
Focus Media “denies the allegations entirely,” the company said. The shares rose 6.9 percent to $16.49 at 8:49 a.m. New York time. They ended last week at $25.50.
More than $1.36 billion of Focus Media’s value was wiped out yesterday, the biggest erosion of market capitalization following a Muddy Waters report since June, when it said Toronto-traded timber producer Sino-Forest Corp. was misleading investors. Analysts from at least 10 firms had “buy” ratings prior to the report, Bloomberg data show.
Chinese stocks trading in the U.S. have faced investor scrutiny this year after companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations. Block fueled the speculation with reports on Rino International Corp. and Sino-Forest Corp.. More than 35 non-U.S. companies had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the U.S. Securities and Exchange Commission.
Focus Media is overstating the number of screens in its ad network by about 50 percent, Muddy Waters said yesterday. Block’s firm said Focus Media has also overstated the value of takeovers, leading to writedowns of $1.1 billion following $1.6 billion of acquisitions since 2005.
“Allegations relating to historical acquisitions, impairment charges and write-offs impugn the motives of management without foundation or basis,” Focus Media said in its statement.
The company said it will recommend that the board hire an outside firm to review the size of its ad network.
Muddy Waters said investors should assume the firm is betting against Focus Media shares. It’s the seventh company targeted by Muddy Waters and the second-largest by market value behind Sino-Forest.
“Many of the items we discuss in this report are symptomatic of a highly troubled enterprise that is run solely for the benefit of insiders,” Muddy Waters said in the report, which was posted on its website. “The problems we have uncovered are likely the tip of the iceberg.”
The short seller spurred a 74 percent drop in Sino-Forest between June and August after saying the timber owner overstated the value of its assets. Before Muddy Waters issued its Sino- Forest report, there were nine ratings on Sino-Forest shares, according to data compiled by Bloomberg. All of them were “buy” recommendations.
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