Phoenix New Media: Yidian Sale Amendment (revised)

Note: this article was revised 7/25 to incorporate details from the amended sale agreement filed by Phoenix TV( LINK)

Phoenix New Media (凤凰新媒体) announced that terms for the $448mm sale of its stake in news aggregator Yidian Zixun (一点资讯) have been amended (LINK).  Key terms:

• Sales proceeds of $448mm and estimated net proceeds of $409mm are unchanged, but FENG will now sell 34% of Yidian rather than 32%.  This implies a 6% reduction in the valuation of Yidian.
• FENG will retain 3.63% of Yidian with an implied value of $48mm rather than 5.63% with an implied value of $79mm
• The sale will be completed in 2 steps:
  • $200mm Step 1 will close following receipt of $200mm of cash by August 10 and Phoenix TV shareholder vote (date not set, but meeting notice will be sent by September 30).
  • $248mm Step 2 will close by August 10, 2020.  After completion of Step 1 the Buyer is contractually bound to complete Step 2.  If payment is delayed then interest will accrue at a rate of 15% on the unpaid balance and Phoenix will have the right to terminate the agreement and retain the $50mm deposit.
• FENG will receive cash as follows:
  • $100mm deposit already received
  • $20mm additional payment already received in July.
  • $20mm additional payment by July 30, 2019
  • $60mm additional payment by August 10, 2019
  • $50mm additional deposit payable upon approval of the sale by Phoenix TV shareholder meeting
  • $198mm additional payment by August 10, 2020
• Yidian shareholder approval required

Comments:

• Shareholder approvals are highly likely since all key parties have probably been involved in negotiations.
• Closing of Step1 will leave FENG with $307mm ($4.20/ADS) of net cash and short-term investments.
• Deferral of part of the proceeds means that FENG management is likely to reconsider allocation and timing of use of the proceeds.  FENG will have the Step 1 cash within weeks, but cannot freely use it until the Phoenix TV Meeting in October.  Shareholders may not get a special dividend in 2019.

FENG shares have fallen about 19% since announcement of the failure to close the Yidian sale as originally scheduled while shares of its HK-listed parent company Phoenix TV have risen 1%.  It appears that FENG investors overreacted to a temporary setback.

FENG shares appear to be a bargain at the current price, but uncertainty over use of proceeds and possible deferral of any special dividend remove a near-term catalyst for appreciation.

DISCLOSURES

The author is a shareholder of Phoenix New Media.  The author does not make any recommendation regarding any investment in any company mentioned in this article.  Investors are encouraged to check all of the key facts cited here from SEC filings and other sources prior to making any investment decisions.