Shanda Games IPO goes online for $788 million

Shanda Games yesterday launched an initial public offering that aims to raise as much as $788 million ahead of a US listing. The company is a spin-off from Nasdaq-listed Shanda Interactive Entertainment, which will retain a 78.1% stake in Shanda Games after the IPO.

The offering consists of 63 million American depositary shares (ADS), each representing two Class-A ordinary shares. Shanda Games is offering 13 million primary ADS, while the parent company is selling off a stake that amounts to the remaining 50 million ADS. An indicative price range has been set at between $10.50 and $12.50 per ADS.

There is a 15% overallotment option that could introduce another 9.45 million ADS into the deal. Fully exercised, this could take the maximum deal size to $906 million.

Shanda Games is a Chinese online gaming company that develops and operates massively multiplayer online role-playing games (MMORGS), a genre of computer role-playing games in which a large number of players interact with one another within a single virtual world, as well as advanced casual games. Shanda Games was spun off from Shanda Interactive in July last year when the Shanda group underwent a restructuring. The rationale was that the parent company would pursue its goal of becoming an online media company with a broader base, leaving Shanda Games to focus on the business of making games.

This is not to say that Shanda Games is a small outfit: gaming has long been a core business for Shanda Interactive, so it has spun off quite a substantial chunk of the company. Even if the deal prices at the bottom of the indicated range, the company will have a market capitalisation of over $3 billion.

In effect, the IPO will allow investors to gain exposure to a pure-play gaming business. As well as the gaming company, Shanda Interactive has another company called Shanda Online, a platform that third-party game designers can use to host their games. There is also Shanda Literature, a network that gamers can use to discuss their favourite games. Another group company is Hurray! Holding Company, a Chinese digital music provider that Shanda bought in June for $46.2 million.

Shanda Games is not the first Chinese internet company to offload its gaming business this year. In April, Sohu.com spun off its online gaming subsidiary Changyou.com in a $120 million IPO. The deal went on to become one of the most successful US listings so far this year: since Changyou.com shares were listed at $16 a share, the stock has more than doubled and is currently trading at about $40.

Since most of the IPO consists of secondary shares, Shanda Games is only expecting to raise net proceeds of around $140 million. The company said in a stock exchange filing that it will use the money for general corporate purposes, such as funding future investments, joint ventures and acquisitions.

The deal values the company at between 10.9 and 12.9 times its forecast 2010 earnings, according to US generally accepted accounting principles (GAAP). Investors are comparing Shanda Games with other Chinese gaming companies, such as Changyou.com and NetEase.com, which are all trading at around 12 to 14 times. The parent company is trading at 12.3 times 2010 earnings.

The roadshow started in Singapore yesterday and the price is expected to be fixed on September 24. Goldman Sachs and J.P. Morgan are joint bookrunners.