IPOs: China Mobile Games Joins Homeward Migration

Bottom line: China Mobile Games could be combined with Shanda Games if buyouts for the 2 companies succeed, followed by a re-listing in China that could gain strong interest from local investors.

China Mobile Games joins de-listing queue

The latest news that China Mobile Games (Nasdaq: CMGE) has received a buyout offer won’t surprise anyone, as it becomes the latest New York-listed Chinese Internet firm to receive such a bid due to its low valuation. What does come as a slight surprise is investor reaction to the bid, which saw China Mobile Games’ share price drop to well below the offer price. The could reflect some skepticism about the quality of this particular bid, which is coming from a Chinese securities brokerage.

This deal marks the latest in a long string of similar buyouts for US-listed Chinese firms whose shares have often languished in New York due to lack of interest from western investors who are unfamiliar with these names. Many of the companies are eying quick re-listings in their home China market, where they believe they can get valuations that are as much as double what they were worth in New York.

The de-listing trend has been especially strong among online and mobile game operators, due to stiff competition that has undermined their growth prospects at home. Giant Interactive was one of the first to de-list, and is now being followed by early industry pioneers Shanda Games (Nasdaq: GAME) and Perfect World (Nasdaq: PWRD).

Somewhat ironically, this particular trend could hinder a much-needed consolidation for the sector. That’s because privatized companies won’t have much incentive to merge and will probably try to do simple re-listings back in China, where less sophisticated investors often don’t care about a company’s growth prospects. But this latest trend could also come to a sudden halt if and when China’s recent stock market rally sputters, which seems almost inevitable by the end of this year.

All that said, let’s look at China Mobile Games’ buyout offer and which other companies might be next to join the buyout queue. The offer came from a group led by the recently listed Orient Securities (Shanghai: 600958), which is bidding $21.50 for each of the company’s American Depositary Shares (ADSs). (company announcement; Chinese article) China Mobile Games’ shares have fallen about 2.2 percent in the 2 trading sessions since the offer was announced, and now trade about 7 percent below the bid price.

Orient Securities is also one of the main backers for the Shanda Games buyout, which has been delayed several times due to financing problems. (previous post) That means that perhaps Orient might be planning to combine the 2 companies after their privatization, and may use its stock market connections to expedite a listing of the new company either in Shanghai or Shenzhen.

If the privatization succeeds, China Mobile Games’ life as a publicly listed company would be relatively short, since the company only listed in late 2012. (previous post) The actual record for short life would go to Sungy Mobile (Nasdaq: GOMO), which announced its own buyout offer last month after only listing its shares in late 2013. (previous post) My best guess is that this latest deal will succeed in the end, even though investors seem to be slightly worried that perhaps Orient Securities doesn’t have the necessary experience to complete such a complex cross-border transaction.

Let’s close with a look at the remaining field of online game companies and who might be next to privatize. Tencent (HKEx: 700) and NetEase (Nasdaq: NTES) are the 2 clear industry leaders, and neither is likely to make such a move anytime soon. There aren’t too many players left in New York, though 2 candidates could include the recently listed iDreamSky (Nasdaq: DSKY) and the older The9 (Nasdaq: NCTY). Others could include several Hong Kong-listed players, such as Forgame (HKEx: 484) and Linekong (HKEx: 8267).

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