FINANCE: Shanda Enters New Phase with Legg Mason Investment

Bottom line: Shanda’s purchase of a major stake in Legg Mason marks the start of a global investment spree that is likely to see 2-3 similar sized deals in the Chinese and global financial services sectors by the end of this year. 

Chen Tianqiao kicks off Shanda global buying with Legg Mason stake 

With its former online entertainment empire now firmly in the past, Shanda Group looks set to embark on the next chapter of its development as a private equity investor in the financial services sector. The first major step in that campaign is in the headlines today, with US asset manager Legg Mason (NYSE: LM) announcing that Shanda has just purchased 10 percent of the company.

The purchase looks like a small first step for Shanda onto the global stage in its new carnation. The company was formerly a Shanghai-based group founded by the financially savvy Chen Tianqiao, who was an early pioneer in China’s online game industry. But poor management and a series of unlucky developments led Shanda to lose its early lead in the space, and Chen has spent much of the last 3 years selling off his various entertainment assets.

The largest of those, the former Shanda Games, recently completed its privatization and de-listing from New York, freeing up Chen to pursue his newer interest as a private equity investor, playing on his natural strength as a deal-maker. As part of the transformation, Chen has moved his headquarters from Shanghai to Singapore, which has a stronger reputation as a financial hub and also where it should be easier for him to invest in global assets. Shanda still maintains offices in Beijing and Shanghai.

The company has now made its first officially disclosed big deal with Legg Mason, a well-known US asset manager with more than $650 billion in assets under management. The deal is relatively straightforward, with Shanda buying 9.9 percent of the company from previous owner Trian Fund Management LP. (company announcement)

No price was given for Shanda’s purchase. But based on Legg Mason’s current market value of about $3.5 billion, the deal would have cost Shanda around $350 million, a good amount for its first major global purchase. It doesn’t appear that Shanda will gain any representation on Legg Mason’s board, though the US company does say the deal will provide it with “expertise in important areas of growth”.

Railed Russell Bid

Shanda made a previous bid in the US asset management sector last year when it joined a group looking to buy Russell Investments. (previous post) That bid, which ultimately failed, saw Shanda join with 2 other partners in an attempt to buy Russell for up to $1.5 billion. Thus if it had succeeded, Shanda probably would have paid about $500 million for a third of the company.

That amount looks roughly similar to this latest deal with Legg Mason, though in this case Shanda’s equity stake and investment are a bit smaller. In a statement accompanying the latest announcement, Chen Tianqiao also indicates that Shanda intends to take an active role with its new US investment by “supporting Legg Mason in its continuing success.”

Chen and Shanda should be quite cash-rich right now and have access to billions of dollars more in credit, following the sale of his entertainment empire that included a Shanda Games that was worth nearly $2 billion when he sold it last year. Chen and his team are still clearly quite skilled at navigating the China market despite moving his headquarters to Singapore. That means perhaps we could see some big new China investments with this Legg Mason tie-up.

At the same time, Chen clearly wants to take Shanda beyond its China roots, as evidenced by his previous bid for Russell and now this new investment in Legg Mason. Shanda is joining a group of similarly globally-minded Chinese private equity investors, including Fosun (HKEx: 656) and HNA Group in making major worldwide acquisitions. I do suspect that this Legg Mason deal is just the first of many that we’ll see for Shanda, and that the company could make 2-3 similar sized purchases in the Chinese and global financial services sectors before the end of this year.

(NOT FOR REPUBLICATION)

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