BUYOUTS: Shanda Games Stumbles, Hanergy Hints at Buyout

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Bottom line: Shanda Games’ privatization could de-rail again due to fraud allegations against the head of its buyout group, while scandal-plagued Hanergy could receive a management-led offer soon to de-list its shares from Hong Kong.

Shanda buyout team leader detained in fraud probe

The “Year of the Buyout” for US-listed Chinese companies is ending on a couple of interesting notes, led by the reported detention of the head of a group trying to privatize Shanda Games (Nasdaq: GAME), one of China’s oldest online game companies. Somewhat ironically, Shanda Games announced its plans to privatize nearly 2 years ago, well before the more recent flood of similar offers announced by around 3 dozen US-listed Chinese companies this year.

Meantime, controversial solar energy equipment maker Hanergy (HKEx: 566) is making its own new noises that hint of a potential privatization bid in the not-too-distant future. In this case the company has announced its founder plans to sell a sizable chunk of his shares for far below their last traded price. The shares have been suspended since May over suspicions of price manipulation, and it’s quite possible this new sale price could indicate a broader plan to take the company private at this new, significantly lower valuation.

It’s somewhat appropriate that the year is ending with 2 privatization stories that are somewhat different from the vast bulk of offers that reached a crescendo in April and May when China’s stock markets were rallying strongly. Shanda Games is one of the earliest cases in the wave, which has seen mostly management-led groups launch bids to privatize their companies and re-list them at higher values in China. Hanergy’s story captured global headlines briefly back in May, because it highlighted the rampant price manipulation that often takes place behind the scenes for many Chinese stocks.

Let’s begin with Shanda Games, which announced its original plan to privatize back January 2014. (previous post) Financing for the offer came unraveled at least once, and probably several more times, before Shanda finally thought it had the necessary money in place earlier this year. The final funding came from a group based in Ningxia, a dusty, relatively backward province in China’s western interior.

Shareholders approved the final deal and the buyout closed late last month. But now it seems that the man who led the buyout group has been detained, after several investors complained that he took their money and promised shares in the company to too many parties. (Chinese article) The detention of Ma Shengguo appears is part of a fraud case being built against his buyer group, which is also being sued by several of its investors. (English article)

Shanda Games shares are still being quoted on the Nasdaq, so it’s unclear how this latest twist will affect its de-listing plan. It’s quite possible the plan’s funding could fall apart as cheated investors file new lawsuits and the courts freeze up bank accounts until the matter is settled. That means the company could once again see its privatization plan indefinitely delayed.

Hanergy Founder’s Stake Sale

Next there’s Hanergy, whose shares are mostly held by its founder and chairman Li Hejun. The company’s stock nearly tripled between the start of this year and May, before suddenly losing nearly half its value in just a few seconds of trading one day. The stock has been suspended ever since, and reports have emerged saying the Hong Kong securities regulator is investing the company for possible share price manipulation.

Now Hanergy has just announced that Li will sell about 6 percent of the company’s stock at a price of 0.18 yuan per shares. (English article) That’s a tiny fraction of their last quoted price of HK$3.91 before the suspension, and values the company at just $1.2 billion.

Even after his stake sale Li will still own 75 percent of the company. That would leave just a quarter of Hanergy’s shares outstanding in the open market, worth about $300 million. Such a sum would be easily affordable for Li should he choose to privatize his company, which looks like a smart and likely option as Hong Kong aims to eject the scandal-plagued company from its stock exchange.

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