China Mediaexpress Holdin (NASDAQ:CCME)

The GeoTeam® is updating TMI valuation scenarios due to information brought to our attention by a GeoInvesting user (Drexion). We originally computed future earnings per share figures using a share base of 32.7 million (as indicated by the company) before the addition of potential make good shares. However, this share count does not take into account the existence of warrants with an exercise price of $5.50. The proper fully diluted share count should be approximately 45 million.

Drexion also highlighted the following potential arbitrage opportunity

• Current Price of Common Stock: $7.83
• Current Price of Warrants: $0.16
• Strike price of Warrants: $5.50
• Current worth of warrants, at a minimum (implied intrinsic value): $7.83 - $5.50= $2.33

• Buy the warrants at current price of $0.15.
• If the business combination is completed and the warrants become exercisable then the warrants should approach the implied value.
• Profit = (New Value of Warrant, Properly Priced) minus $0.15.

There is caveat that is likely contributing to current warrant price.

Excerpts from TMI 2008 10K

• An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless.
• An investor will only be able to exercise a public offering warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.
• The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration is not effective at the time of exercise, the holder of such Warrant will not be entitled to exercise such Warrant and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the Warrants may expire unexercised, unredeemed and worthless.

Furthermore, several acquisition deals have fallen through over the past nine months.  If this happens to TMI, the warrants would be worthless upon liquidation.

Drexion's opinion on the likelihood that this deal will not be consummated.

On March 31, 2009, TM announced that it reached an agreement with Opportunity Partners L.P., a fund in the Bulldog Investors (“Bulldog”) group of private investment funds in connection with Bulldog’s then ongoing consent solicitation and proposed proxy solicitation. In connection with the settlement, Bulldog agreed (i) to cease its efforts to effectuate an early windup of TM, (ii) not to oppose the board of directors at the next meeting of stockholders or otherwise seek to exercise control over the management of TM, (iii) to withdraw its demand to force TM to hold an annual meeting of stockholders, and (iv) to enter into a forward contract with TM or a third party whereby Bulldog would not vote its shares against a proposed business combination. As part of the settlement, TM agreed to name Gerald Hellerman to its Board of Directors, who is independent of both Bulldog and TM. In addition, TM reimbursed Bulldog for certain expenses it incurred in connection with its consent solicitation and proposed proxy solicitation. As of the date of this proxy, Bulldog owns 2,340,550 shares of TM Common Stock, representing an 18.7% ownership interest. We believe the fact that Bulldog agreed to enter into a forward contract with TM enhances the likelihood that TM will receive stockholder approval for each of the proposals being voted upon at the Special Meeting.

Thus we already have 18.7% of the vote guaranteed. Another 33% of the public-vote is required and then management's 18% goes along with the majority.

The 18.7% holder agreed to not vote against the acquisition. I am not sure this means a 'Yes' vote or a 'Abstain'. The critical component here is that without voting 'No', that holder cannot choose to be one of the parties liquidating their positions if the measure passes (Must vote 'No' to get that liquidate-option). This is very good due to the 'If more than 30% choose to liquidate, acquisition does not happen' rule that is in place....That was a very high shareholder bar they had to pass, and the bar is now much lower. The Director that the 18.7% holder got to place on the board DID vote for the acquisition, so it is very possible they will vote 'Yes' and have it count towards the majority (Management's 2.1M shares votes along with majority).

I think it is important to note that a number of the major institutional holders of the TMI common also have very large TMI Warrant positions, as of 6/30/09. If they were planning to vote 'No', that warrant position would make no sense. Let me list some of them real quick:

QVT Financial LP 1.0M shares common, 600.0K warrants
HBK INVESTMENTS, L.P. 942.5K shares common, 515.9K warrants
DEUTSCHE BANK AKTIENGESELLSCHAFT 234.1K shares common, 202.7K warrants
BASSO CAPITAL MANAGEMENT, L.P.114.8K shares common, 577.1K warrants

Drexion's opinion on the "warrant caveat".

Fairly common verbiage... It will definitely be exercisable as soon as the acquisition is approved...If it is approved... That's why CME made sure to put in the clause where they get the first 20M raised from warrants.

The GeoTeam® will offer updates when more details become available.

While this strategy does appear attractive, investors must still consider the potential risks associated with the story.

Disclosure: The GeoTeam® has established a position in the warrants due to the favorable risk/reward opportunity.