Perfect World Shanda

Chinese online game developer and operator Perfect World (NASDAQ: PWRD) announced that it has entered into a share purchase agreement with Chinese MMO rival Shanda Games (NASDAQ: GAME) to acquire overall 30 million class A ordinary shares in the latter with $100 million cash from Shanda Interactive Entertainment Limited, the controlling shareholder of Shanda Games. The purchase is expected to finalize in 30 days.

In addition, Perfect World also joined the consortium intended for Shanda Games’ privatization drive. The consortium has submitted a preliminary non-binding proposal letter dated January 27, 2014 to the board of directors of Shanda Games at a proposed price of $3.45 per class A or class B ordinary share, or US$6.90 per ADS at a market valuation of $1.9 billion.

Perfect World will take a 5.6% stake in Shanda Game based on its currently valuation of $1.81 million. Both of the parties noted that the investment dose not indicate any cooperation in gaming business operations.

As gaming concept becomes increasingly popular in China, Chinese stock market gains more attraction for US-listed Chinese gaming companies to return to domestic market. Chinese online game operator Giant Interactive (NYSE: GA) has launched a privatization bid in November last year and Shanda Games followed the suit to launch privatization plan in January this year.

For Perfect World, which has lagged behind in going private, the competition in domestic gaming market will be as fierce as ever and an alliance with leading peer will create synergistic effects. Moreover, a minor stake in Shanda Games is a less risky step to test domestic market.

On the other hand, the tie-up may also offer solid supports to Shanda Games. In addition to fend against rivalry from mobile gaming companies, Shanda Games, the major revenue source of its parent company Shanda Interactive, is encumbered by the burdens from other businesses under the group, like  video site Ku6 and online literature platform Cloudary.

The revenue of Perfect World Group mainly comes from investments in film and television industry, while gaming sector only accounts for 30%-40% of the total revenue. To cooperate with a company that has wider business coverage in entertainment industry may help Shanda Games to consolidate its foothold in returning to domestic market.