Construct a Hedged Position with Shanda Interactive and Shanda Games

In my previous two articles: "Shanda Games SpinOff" and "Shanda Mispricing", I talked about how Shanda Interactive (SNDA) is mis-priced based on the market value of Shanda Games (GAME), because each Shanda Interactive share owns about $20 cash, 3 shares of GAME and $9 worth of a gaming platform business.

It actually does not take a PhD degree to figure out from the articles that you can extract the value of the ex-Game stub of SNDA by long one share of SNDA and short 3 shares of GAME. This stub has been on sale between $14 and $18 for the past 2 weeks, while its actual value is more like $29.

For the past 3 days, the stub price has been rising. The SNDA price dropped, but the GAME price dropped even harder.

Many GAME stock holders get frustrated on the GAME share price drop while they did not find much change in fundamentals and believed that the share price became disproportionally cheaper than its peers. Many of them believe that the majority of money managers will choose to sell SNDA and buy GAME since GAME is a much purer online game play than SNDA, which will expand into the content business.

But the truth may just be the opposite. A hedged position has about 60% upside, from $18 as of today to $29. As I mentioned in "Shanda Mispricing", one way to converge is for SNDA to announce a complete spin-off of GAME shares. But I believe that the convergence, or a close convergence, will come as early as the next earning report, when the numbers are made clearer. As a result, a smart money manager is most likely doing the opposite: buying SNDA and selling GAME.

Disclosure: Long SNDA, Short GAME

Comments

[ginger78:]

Obviously SNDA shareholders disagree with you, because they've been unwinding from their high-dollar positions in SNDA--whose only reason for existing was its gaming business, yet it transferred all of its gaming assets to GAME. And they been accumulating GAME. I repeat: GAME now comprises ALL of SNDA's gaming business and assets (and liabilities)--minus its original cash plus the cash and stocks derived from its spinning off GAME. (Also, please note SNDA's 5-year noncompete agreement in GAME's perspectus, so SNDA needs to find another business or ponder its navel in the interum.)

I argue that SNDA has screwed its shareholders by selling its gaming assets for $10.50 to $12.50 per share--if GAME's share price doesn't increase from the initial sale price. In effect, SNDA is betting that GAME will increase in value, thereby increasing the value of SNDA's 71% of GAME's stocks.

That's why SNDA has dropped nearly $10/share since GAME's IPO. I believe that GAME has been getting battered in order to give the powers-that-be the time to unwind from their SNDA positions and buy into GAME.

I've seen this kind of manipulation again and again. GAME will increase in value as soon as the big boys' unwinding of SNDA has occurred. SNDA is betting on it.

Oct 09 11:13 AM

[Chimin Sang:]

Ginger,

SNDA's carve-out of GAME is very well thought out. The real purpose of this transaction goes way beyond stock prices of GAME or SNDA. What appears to be an IPO for Shanda Games is actually to tap into the capital market to fund some bold transactions in the content business, which would not make its own way into the IPO market.

Oct 10 09:59 PM