Shanda Games Follows Parent In Privatizing
One of China’s biggest online entertainment companies is rapidly disappearing from the publicly listed realm, with word that Shanda Games (Nasdaq: GAME) has become the latest US-listed Chinese firm to receive a management-led buyout offer. The news came as a surprise to me, since many believed that Shanda’s parent, Shanda Interactive, wanted to follow a strategy of listing its various units individually after it made its own privatization 2 years ago. But from another angle, this de-listing plan isn’t all that unexpected since Shanda Games’ shares have languished since they were first listed in 2009.
The announcement by Shanda Game
The announcement by Shanda Games marks the latest in a growing series of privatization plans by US-listed Chinese firms whose shares failed to excite investors. Most of the plans have been sponsored by management-led groups, though a number have also come from private equity firms looking for undervalued companies. Many of China’s top Internet names staged a strong rally last year, with big names like Baidu (Nasdaq: BIDU) and Ctrip (Nasdaq: CTRP) posting gains of 50 percent or more on investor enthusiasm towards China’s Internet. But some of the lesser known names like Shanda missed the rally, and have seen their shares languish due to lack of investor interest.
Shanda Games made its listing debut in 2009 at an IPO price of $12.50, but was never able to reach that level again afterwards. Its shares dipped as low as $3 last year, as it posted meager growth in China’s highly competitive online game market where it had to compete with industry leaders like Tencent (HKEx: 700) and NetEase (Nasdaq: NTES).
According to its newly received privatization offer, the management-led group will pay $6.90 for each Shanda Games American Depositary Share (ADS), or just over half of the company’s original IPO price from 4 years ago. (company announcement; Chinese article) The offer price represents a 22 percent premium to Shanda Games’ last closing price before the deal was announced. Shanda’s management is pairing with a unit of Primavera Capital to finance the deal values, which values Shanda Games at $1.9 billion.
Chen Tianqiao was quite efficient
Shareholders reacted to the news with indifference, with Shanda Games shares rising just 15 percent to $6.50 after the announcement, well below the offer price. I’m not sure why anyone is skeptical, since Shanda’s founder Chen Tianqiao was quite efficient in his earlier privatization of Shanda Interactive. What’s more, the buyout group controls three-quarters of Shanda Games’ shares, meaning there’s no chance that shareholders might reject the offer.
The privatization raises interesting questions for Shanda’s last remaining publicly listed company, Ku6 Media (Nasdaq: KUTV), an Internet video firm whose shares have also languished as it struggles for direction. Ku6 shares dropped 10 percent in the latest trading session, indicating that no one is expecting a privatization offer for the firm anytime soon. The buyout also raises interesting questions for Cloudary, Shanda’s online literature unit that has unsuccessfully filed to list several times in the past.
So, what do I see ahead for Shanda, and more broadly for this ongoing privatization wave? Shanda made a big change in late 2012 when Chen hired a new president to try to bring more synergies into the company. This privatization may be part of that new president’s strategy, as he seeks to overhaul Shanda out of public view. This latest move could mean that Cloudary won’t be going public anytime soon, and that Shanda may also try to take Ku6 private later this year. More broadly speaking, the privatization also shows that the wave of buyouts for Chinese firms is likely to continue this year, and investors could make some quick money if they can identify some of the candidates for future de-listings.
Bottom line: The de-listing of Shanda Games could be followed by another de-listing of sister company Ku6 later this year, and may put an IPO for Shanda’s Cloudary unit on indefinite hold.
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