Chinese internet pioneer Sohu.com may have just started a trend. The online media group is offering to buy out minority investors in a U.S-listed video-games subsidiary for a near 70% premium. The move looks opportunistic: shares in the unit, hit by Beijing’s regulatory crackdown, are well below a 2017 peak. Others may take the cue.
Monday’s offer will be boss Charles Zhang’s second attempt to take over Changyou, the developer behind one of China’s most popular desktop titles, Tian Long Ba Bu. Two years ago, Sohu swooped with an offer when the company was grappling with a shift to mobile gaming and disappointing earnings, plus competitive pressure. The tentative effort came to nothing.
The outlook for Changyou, 67%-owned by Sohu, looks even worse today. It has largely failed to match its PC success in smartphones, where far-larger rivals like Tencent dominate. Meanwhile, a block on new game approvals in the mainland last year, plus tougher rules on everything from violent content to avoiding myopia, has also weighed on financial performance.
Zhang’s latest offer, at $10 per American depositary share, values the beleaguered Changyou at just $532 million. That’s punchy compared to the undisturbed price, but roughly 5 times forecast 2020 earnings. To compare, the sector trades on an average 13 times multiple, according to Refinitiv.
The longer term benefits to the parent are even less clear. Sohu, known for its PC-era internet portals, has long been eclipsed by the likes of Tencent and Alibaba. Consolidating its video-games unit could be a distraction for the company’s loss-making media and video-streaming businesses. Shares in Sohu may have rallied 7% on the buyout offer, but investors still value the company at less than half its combined equity stakes in Changyou and another U.S.-listed subsidiary.
That doesn’t mean it won’t inspire other founders to find similar bargains in China’s battered video-games sector. Hong Kong-listed iDreamsky, for instance, has seen its shares slump by more than a fifth since going public last year. Zhang may have put others in play.
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