Shanda to buy majority stake in Hurray!

Shanda Interactive Entertainment, China's largest online gaming company in terms of revenues, yesterday announced a tender offer to buy a 51% stake in Chinese digital media provider Hurray! Holding Company. Both companies are listed in the US.

The acquirer is offering to pay $4.00 per American depositary share, which represents a 25% premium over Hurray!'s closing price on June 5 and a total acquisition cost of $46.2 million.

Although the deal is not subject to any financial conditions, it is necessary that at least 51% of the company's shares are tendered. Hurray!'s board has already recommended the proposal to shareholders. Managers and founders hold 23% of Hurray!, while venture capitalists own 12%.

The deal has been a long time in the making. Ever since Hurray! listed on Nasdaq in 2005, it has been courted by a number of potential acquirers, including Shanda. A few months ago, a consortium of investors under the name of Best Prospect Overseas made a similar offer for 51% of the company, only to be turned away by the management due to concerns about the identity of the consortium and uncertainty regarding how the deal was going to be funded.

Hurray! started out as a company that distributed ring tones in China. This market became subject to strict control by the regulators, which contributed to a $42 million loss in 2007 and a $12 million loss in 2008. The difficult market motivated the company to diversify into other areas: artist development, music production, and offline distribution in China through its record labels Huayi Brothers Music, Freeland Music, and New Run.

"We view the acquisition of this loss-making, but cash-rich company as neutral to Shanda," said Royal Bank of Scotland (RBS) in a research note published yesterday. While the purchase could bring some improvements to Shanda's mobile gaming business, RBS pointed out that Hurray! only generates "minimal" gaming revenue from Digital Red, a mobile game company that it acquired in 2004.  

The acquirer is enjoying both strong results and a well-performing share price. Last week, Shanda reported its results for the first quarter of 2009, which beat analysts' top-line forecasts by 5%: net revenues were $162 million, up 9% from the fourth quarter of 2008, or 46% year-on-year. And at the close of trading on Monday, Shanda shares were trading at $61.64 each, well above their 52-week-low of $21.08 in December.

Investor appetite in China's online gaming sector has remained strong over the past year. Even as late as mid-September, when the financial crisis was developing in earnest, Shanda was able to issue a $155 million three-year convertible bond. The bond was issued to fund a $200 million share buyback. The company already had a net cash balance of $378 million, but it wanted to keep cash available in case of acquisition opportunities, such as Hurray!.

As of the end of the first quarter 2009, Shanda had $694 million in cash, which means that it has enough money to pick up some more small players. Though, some analysts are already voicing concerns that too many purchases could pull the company away from its core business of online games.  

Shanda was advised by China eCapital Corporation, while Hurray! was advised by Nomura.