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Summary

  • After 7 months and a widening spread, core backers out.
  • What does their exit mean for the deal?
  • Deal spread to widen? Still a good trade?

Shanda Games (NASDAQ:GAME) just issued a press release announcing that there had been some changes in the buyout group. Primavera Capital, Perfect World (NASDAQ:PWRD), Carlyle, and FountainVest have pulled out of the buyout consortium, but have been replaced by a few new investors. The new backers included Hong Kong-based Orient Finance, an affiliate of Orient Securities, creatively-named Shanghai Buyout Fund, an affiliate of Haitong Securities, and Shenzhen-listed Ningxia Zhongyin Cashmere.

The stock has been trading at a discount to the $6.90 buyout offer for some time, suggesting that the market has been skeptical about the deal getting done. Usually as time, and therefore uncertainty, passes, the market price drifts up to the buyout price, but GAME has been drifting the opposite way after it closed the gap to about 2% in late Spring. As of trading yesterday, the stock had a nearly 9% gap between last close and the proposed buyout.

So what's going on, why the cold feet?

One of the possible reasons for a few of the earlier investors jumping ship is timing - the buyout has already been on the table for about 9 months, which might seem like a long time. Competitor Giant Interactive announced a going private proposal in late November, and finally closed the deal in mid-March. That's about 4 months, give or take, compared to the 7 months (and counting) for GAME.

But the exit of more recent consortium members doesn't really have the same argument (they've been in for about 4 months). Carlyle only joined in early May, and FountainVest jumped in a few days earlier in late April, just after Perfect World. Primavera, on the other hand, had been in since the beginning.

Has something come up in the process pointing to more challenges to take the company private? One would think that with the overwhelming number of shares that the consortium controlled, the buyout would be a slam dunk, but at this point, maybe investors aren't so sure.

Given the possible return (about 9% if the deal goes through), the trade might be interesting assuming the deal closes soon (a few more months), but with the latest hiccup, investors need to consider the possibility that the deal won't get done. It's a long way back to the $5 per share pre-buyout range, so anyone thinking about this trade should weigh the risk/reward profile carefully.

Source: Shanda Games Buyout Consortium Shake-Up