I wasn’t too surprised to read that online entertainment firm Shanda Interactive has refiled to make a New York IPO for its Cloudary online literature unit, which it had to postpone last summer after market sentiment tanked amid a series of accounting scandals at US-listed Chinese companies. (Chinese article) What’s more intriguing is another report saying that Bank of America’s (NYSE: BAC) Merrill Lynch unit, one of the original underwriters, has resigned from the case, and has been replaced by CICC, China’s leading investment bank. (Chinese article) Of course it’s difficult to interpret too much from this kind of development, but we saw similar resignations in several cases last year, most notably from leading group buying site LaShou, after the original investment banks on the offering reportedly had strong reservations about accounting practices at those companies. Shanda Cloudary’s case could be slightly different, as the media reports say the other underwriter, Goldman Sachs (NYSE: GS), is still on the deal, and it’s common knowledge that Merrill Lynch has gone through quite a bit of turmoil since its hasty acquisition by Bank of America at the height of the global financial crisis in 2008. So let’s take a quick look at this deal, which becomes the third New York IPO filing for a Chinese company this year, following previous applications by car leasing firm China Auto (previous post) and Internet e-commerce firm Vipshop. (previous post) Media reports indicate that Shanda hopes to raise up to $200 million in the offering for a literature unit whose revenue rose 78 percent last year to 700 million yuan, or just over $100 million. But the unit is still losing money, posting a net loss of 36 million yuan, marking the second consecutive year of narrowing losses. Fierce competition on China’s Internet has meant that many companies are now losing money, with even formerly profitable e-commerce leader Dangdang (NYSE: DANG) reporting a rapidly widening quarterly loss last week. (previous post) Online literature is a hot area, and Shanda was one of the earlier players in the space, meaning it’s quite possible Cloudary could become profitable in the next year or 2 if competition doesn’t get overheated. But I do sense that Shanda is hurrying this offer before the timing is ideal, probably to raise funds to help pay for the $700 million privatization of the parent company, Shanda Interactive, that just wrapped up earlier this month. Taking everything into account, I would look for this new offering to finally make it to market in the next few weeks, unlike the Vipshop offering which is likely to run into trouble. But even if it does get to market, look for a cool investor reception and a flat to negative trading debut for the stock.
Bottom line: Shanda’s revived IPO for its online literature unit is likely to make it to market, but will meet with cool to negative investor sentiment on its trading debut.
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