Shanda Games Buy-Out Unravels
Big privatization deals are never easy, as we’re seeing with signs that a buyout plan launched by the controlling shareholder of online game firm Shanda Games (Nasdaq: GAME) is rapidly unraveling. Shanda Games’ parent, Shanda Interactive, launched the plan back in January, as part of a broader wave of similar privatizations for undervalued US-listed Chinese companies. Shanda Interactive is saying the buyout is still alive, though other shareholders are clearly growing skeptical, based on Shanda Games latest stock price.
Shanda Games
The bigger picture in the Shanda Games saga is the troubled state of China’s online game market, whose fierce competition and fragmented nature have created a landscape filled with mid-sized low-growth companies. Only a handful of leaders like Tencent (HKEx: 700) and NetEase (Nasdaq: NTES) can consistently post double-digit growth, and the sector is sorely in need of consolidation.
I previously predicted that Shanda Games, once an industry leader, could help to drive that consolidation when it announced in April that it was selling 6 percent of itself to Perfect World (Nasdaq: PWRD), another mid-sized player. (previous post) But now Perfect World has just announced it has dumped its Shanda Games stake (company announcement), and Shanda Interactive has announced some major changes to the make-up of the group leading the Shanda Games buy-out. (company announcement)
Shanda Interactive said that several China-based investors have joined the group, and that original partners Primavera and another western-backed investment fund, along with Perfect World, pulled out of the bid. Other media reports said the investment fund that pulled out of the bid included US private equity giants Carlyle and FountainVest.
The meaning here is quite obvious: The big western investors and strategic partner Perfect World found something they didn’t like about Shanda Games and decided to pull out of the deal. That forced Shanda and its deal-making founder Chen Tianqiao to find new partners, in this case several mainland investors that almost certainly have government connections and probably are far less sophisticated than their western peers.
The announcement fueled worries that Shanda Games may be unable to close the deal, with its shares sagging nearly 2 percent after the announcement. At their current price of $6.16, they are now more than 10 percent below the official buy-out price of $6.90 when the $1.9 billion deal was first announced. I wouldn’t be surprised to see the stock fall further still, as this latest announcement indicates the buy-out could fall apart completely.
In separate reports, Chen Tianqiao quashed speculation that Shanda Games was struggling, insisting that his group had no intention of exiting the online games business. (Chinese article) Chen once hoped to build his company into an online entertainment giant, and Shanda now how a number of units in areas like online literature and cloud computing in addition to its original game business.
But talk has swirled for a while now that Chen wants to sell part or all of his empire and move on to other things, and earlier this year reports emerged that he was in talks to sell his entire company to acquisitive e-commerce giant Alibaba (previous post). But that deal never happened, and Perfect World tie-up has come unglued as well.
It’s impossible to say exactly why this buy-out is unraveling without more information, but my guess is that the western buyers and Perfect World didn’t like the way that Shanda Games was trending. The company still hasn’t reported its second-quarter results, but its revenue and profit were down 10 percent and 16 percent, respectively, in the first quarter. I suspect we’ll see that downward trend accelerate when the company finally does release its second-quarter report, putting further downward pressure on the stock as investors bet the buy-out deal will collapse completely.
Bottom line: Shanda Games’ privatization deal is likely to collapse, as backers retreat from the offer in response to the company’s deteriorating performance.
