Back in 2009, Shanda Interactive was an internet darling, the second-largest online gaming operator in China, trailing only NetEase. The company dominated the online literature and video-sharing market. When it spun off its gaming unit Shanda Games on Nasdaq two years ago, it raised $1 billion – one of the largest initial public offerings in the US that year. Flushed with success, founder Chen Tianqiao declared that he wanted to turn his company into “China’s Disney” (see WiC49).
The dreams of the Magic Kingdom now look a little far-fetched. Shanda’s second-quarter net profit was well below analyst forecasts, falling 95% to Rmb8.8 million. In the first nine months of this year Shanda’s shares had already lost 26% in value, underperforming its peer group.
Might that actually presage an opportunity? Last week Chen announced that he and his family is planning to take Shanda Interactive private again, with an offer that values the company at roughly $2.4 billion.
Shanda Interactive listed on Nasdaq in 2004, but about three-quarters of its revenues still come from its gaming unit.
Chen, along with his wife and brother – who is also Shanda’s chief operating officer – together hold about 68% of Shanda and the group is offering $41.40 per American Depositary Share, a 24% premium to last Friday’s closing price. On Monday, Shanda’s ADS price jumped as much as 21% to $40.40 in early trading, putting it among the largest gainers on Nasdaq.
Chen has struggled to convince analysts in the US that Shanda’s non-gaming units will deliver significant profits, says the New York Times. They have also griped about the parent company’s transparency. But he himself believes Shanda’s non-gaming business is undervalued. In May, Shanda’s online literature business unit, Cloudary, filed with US regulators for an IPO seeking to raise $200 million. A successful spin-off might put Shanda on a path as majority shareholder of a portfolio of digital media businesses, says Digital East Asia, an industry blog.
There are also rumours that Chen wants to list Shanda Interactive on China’s domestic A-share market, says the Economic Observer, on terms more favourable than those on offer in the US.
“For now, Chen should divorce the stingy American shareholders and remarry the generous A-share investors in China. Even though we can’t seem to figure out why A-share investors would be willing to give such high valuation on internet stocks,” was the verdict of Li Zhiqi of consulting firm China Business Creative Team.
And the move may also have a political dimension. In September, the authorities in Beijing said they were considering new regulations to govern some of the structures used by many Chinese companies to list in the US. Known as a variable interest entities, or VIEs, the structures use a series of contractual agreements to enable an offshore holding company owned by foreign investors to control stakes in businesses inside China that aren’t formally permitted to be foreign-owned (such as those in the internet industry).
VIEs have since spread to other industry sectors but tech firms like Shanda were some of the first to use the loopholes to tap overseas investors without breaking local ownership restrictions. Industry observers say Chen’s latest move may be another sign that internet operators are now bowing to pressure to comply with the new regulations.
Back in June, Jack Ma, founder and chairman of Alibaba Group, claimed something similar with Alipay, spinning it off from the group and transferring it to purely domestic ownership. This immediately triggered a fierce dispute with Yahoo. But Ma claimed that he had no choice, saying he was warned by China’s central bank that Alipay would not be allowed to operate if it was, in effect, partly foreign-owned. (see WiC112).
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