SINA - FMCN Merger A Positive

SINA Corporation (SINA - Analyst Report) has agreed to acquire Focus Media Holdings Limited (FMCN - Snapshot Report) in a stock exchange that has met with almost universal disapproval in the press and by analysts.

SINA is an internet web portal whereas FMCN is an offline advertising company.

Both are growing rapidly, SINA’s 3Q08 increased by 68% year to year to $105 million and FMCN’s increased 64% to $225 million. Both are profitable with positive cash flow. FMCN had non-GAAP net income of $71 million and SINA reported $28.5 million. FMCN has about $18 million of capex so the combined companies would have cash flow of over $82 million per quarter.

For the next 4 quarters we would expect combined cash flow to exceed $350 million. At the current share price of SINA the transaction has a value of $1.2 billion, which is only 5.2 times our estimated cash flow for Focus Media.

In the U.S. this would be a cheap deal. There are synergies and significant cost savings in the combined companies. The problem is with the bias of Internet analysts against non-Internet businesses.

In our opinion this is good for SINA.

Read the full analyst report on SINA