ENTERTAINMENT: Shanda Games Heads for Sunset — Finally

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Bottom line: Shanda Games’ imminent de-listing could be followed by a behind-the-scenes consolidation by one or more savvy private equity firms to create a major new online game firm capable of challenging NetEase or even Tencent.

Shanda Games heads for de-listing door

Faded online gaming pioneer Shanda Games (Nasdaq: GAME) is finally heading for greener pastures, releasing what’s likely to be its final earnings report as its shareholders get set to vote on a plan to privatize the company. Shanda Games’ road to privatization has been long and tortured, and is only now finally coming to completion after its initial announcement nearly 2 years ago. (previous post) But that said, I do have to commend Shanda’s strong-willed founder and chief Chen Tianqiao for finally getting the job done.

From a broader perspective, Shanda’s departure continues a trend that has seen online game companies de-listing en mass, after their stocks struggled for years due to stiff competition. In an interesting twist to that trend, these gaming laggards have been one of the few groups to actually complete privatizations among the 3 dozen US-traded Chinese companies that announced such buyouts earlier this year.

Within that huge field of buyout candidates, 2 that have actually de-listed or are close to doing so are online game firms Perfect World (Nasdaq: PWRD) and China Mobile Games, though a few others have publicly said their plans are still alive. That seems to indicate that real investors are interested in de-listing the gaming companies, and hints that perhaps a wave of needed consolidation could finally be engineered by private equity acting quietly behind the scenes.

Shanda Games’ latest earnings report shows why Wall Street investors have largely abandoned this group of companies, many of which are seeing their revenues and profits shrink. Shanda actually just announced results for the first half of the year, even as other companies get set to release their third quarter results. I suspect this will be the last earnings report we ever get from the company.

The company’s profit and revenue fell by 52 percent and 26 percent, respectively, even though Shanda Games is still a sizable firm with $236 million in quarterly revenue. (company announcement) Significantly, there’s no guidance for the third quarter, because Shanda believes it won’t ever have to issue such a report. The company has scheduled a shareholder meeting on November 18 to vote on its buyout offer (company announcement), and is likely to de-list soon after that.

Faded Investor Darling

Shanda parent Shanda Interactive was China’s first online gaming company to list in the US, and was at one time an investor darling when the market was booming and it was a clear industry leader. But the rise of many rivals, combined with the emergence of Tencent (HKEx: 700) and NetEase (Nasdaq: NTES) as sector leader, caused shares of companies like Shanda to stagnate over the years, leading to the recent round of privatization plans.

Shanda chief Chen Tianqiao once hoped to build an online-based entertainment empire, including not only games but also other businesses like online literature, video and cloud services. But most of his products either failed to gain much traction or ran into other problems, and Chen ultimately decided to dismantle his empire and pursue a new career in private equity.

I’ll be slightly sad to see Shanda finally disappear, as the company was one of the first I covered when I began following Chinese tech firms that were making IPOs in New York more than a decade ago. But at the same time, Shanda followed the same path of many of its peers and failed to live up to its potential, and instead dropped into a life of obscurity. All that said, I’m still somewhat hopeful that a savvy private equity firm or other financier will be able to work behind the scenes to assemble a new major player from many of these privatizing smaller companies.

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