INTERNET: Shanda Sells Literature To Tencent, Games To Brokers
Bottom line: New developments in the break-up of Shanda Group are likely to result in the successful sales of its games and literature units in the next 6 months.
The slow-motion break-up of former online entertainment superstar Shanda Group continues in 2 different headlines, with word that its core online literature and gaming businesses are set to be taken over by Internet giant Tencent (HKEx: 700) and a couple of major brokerages, respectively, in separate deals. Both of these deals look quite exciting, as they involve the entry of serious-looking buyers who could ultimately use their acquired Shanda assets to create some interesting and potentially competitive new companies in their respective spaces.
The stories surrounding Shanda Games (Nasdaq: GAME) and Shanda Cloudary are both long and filled with twists, reflecting their parent’s long history in the online gaming and literature spaces. Shanda Games was one of China’s first online game companies to list and was once a leader in the area, but later stumbled as it failed to innovate. Cloudary was also a leader in online literature, but suffered a devastating blow 2 years ago when a big group of its core managers jumped ship to start a rival that later got bought by Tencent.
Let’s begin this Shanda round-up with the latest twist in the Shanda Games story, which began last year when the company announced plans to privatize. That plan ran into trouble when some of the core investors, including rival Perfect World (Nasdaq: PWRD), got cold feet and dropped out of the buying group. Shanda found some alternate investors in the dusty and remote interior province of Ningxia, a turn that didn’t look too promising since such investors would have little to offer in strategic resources.
Now in the latest development, Shanda Games has just announced that 2 big-name players, brokerages Haitong Securities (HKEx: 6837; Shanghai: 600837) and Orient Securities, have joined the buy-out group. (company announcement) Both brokerages are quite sophisticated and also cash-rich, after the former raised $4 billion last year in a share offering and as the latter gets set to make a $1.6 billion IPO. The introduction of these relatively sophisticated investors means they could help Shanda Games to finally close its privatization, and perhaps to improve its outlook through a merger or strategic acquisition with another game company.
Next there’s the news that Shanda Cloudary is combining its operations with Tencent’s online literature unit. (Chinese article) Cloudary was once the clear leader in the space, but then ran into hard times after much of its middle management team defected to form a rival start-up that was bought up by Tencent. Cloudary has struggled to get back on its feet since then, though it remains a relatively large player in the fast-growing space.
Now media are reporting that a family reunion is occurring, with the Cloudary and Tencent literature joining forces into a single entity called ChinaReading Ltd. (Chinese article) The new unit will be co-headed by Tencent literature’s CEO and Cloudary’s CFO, and would instantly become the undisputed leader in the space with 1,200 employees and nearly 2 billion yuan ($320 million) in annual revenue.
No financial terms were given, which suggests the merger is being done on a trial basis for now to see how the 2 sides work together. If it goes smoothly, I expect we could see Tencent buy out Cloudary for $1 billion or more and make the merger permanent.
Both deals are almost certainly being driven by Shanda founder Chen Tianqiao, who has lost interest in his former entertainment empire and reportedly wants to pursue a new career in the deal-making business. The addition of Orient and Haitong Securities to the Shanda Games privatization means that deal could finally close, ridding Chen of his oldest and biggest asset. The chances of a successful send-off for Cloudary also look strong due to historical ties between the unit and Tencent.
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