Shanda Interactive Entertainment Ltd ADS (SNDA)

[eastunder]

Shanda Games Spinoff: Good Move for Shanda Interactive
by: Chimin Sang September 27, 2009
Chimin Sang

http://seekingalpha.com/article/163586-shanda-games-spinoff-good-move-for-shanda-interactive?source=yahoo

Shanda Interactive (SNDA), a Chinese game company, did a very interesting transaction last week, carving out a game company, Shanda Games (GAME), out of itself. This transaction went beyond imaginations of quite a few analysts, as the carved-out company was essentially Shanda itself, with 95% of the revenue of SNDA.


SNDA successfully issued 83.5 million ADRs at $12.5 per ADR, out of which 70.5 million went to SNDA and 13 million went to GAME. The share nevertheless flopped on its first day of debut, shedding 14% to 10.75. SNDA also dropped 12% to $50 at the end of Friday, making its market value $3.34 billion.


This made SNDA a very interesting stock to look at now that we know exactly how much its game business is worth and we can calculate how much the rest of the business is worth.


From the SEC filings, we know the following:


The total number of shares of GAME is 288 million, of which 83.5 million were issued last Thursday night, 204.5 million (or 71%) is still held by SNDA.
Out of the 83.5 million shares issued, 70.5 million were issued by SNDA and 13 million were issued by GAME. Net proceeds discounted by 7% to the bankers were $820 million and $158 million respectively.

The market value of GAME as of EOD Friday is $3.1 billion (288 million x $10.75 per ADR).

The value of GAME stocks held by SNDA equals 71% x $3.1 billion = $2.2 billion.

After accounting for a line of long-term debt, the net cash position of SNDA is $1.4 billion after the carve-out.

Combining the GAME holding and the cash, we know that SNDA should be worth at least $3.6 billion, which is already higher than the current SNDA market value. What does SNDA have left besides cash and stock of GAME? SNDA actually has two lines of business left: One is the content business, which is small in revenue (5% of the revenue) and essentially makes no money at this point. The other one is a game platform business, which runs the games for GAME. GAME pays SNDA 20% of its revenue in order to “use” the platform. This business turns out to be a really sweet piece of pie for SNDA. The platform is all developed and enjoys a very high margin. If we do a simple math and assume this piece of business should have 20% of the market value of GAME and the content business value is zero, we arrive at $0.6 million.


Adding three pieces of SNDA together, we should have $2.2 + $1.4 + $0.6 = $4.2 million, which is equivalent to $63 per share. There is a 26% upside to the current price of SNDA.