BEIJING -- Shares in leading Chinese Internet portal Sina ( SINA) are seeing a pop on takeover rumors. The stock has jumped 16% since mid-August amid speculation that Shanda Interactive ( SNDA), a major shareholder, soon may be forced to offload its stake in the company. Wireless-services firm Tom Online ( TOMO) is most often cited as a potential suitor, but it has internal problems and may not be the only party interested in a stake in Sina, whose shares rose 99 cents, or 3.9%, to $26.17 in New York on Wednesday. Nearly 20% of Sina is in the hands of gaming concern Shanda, which reportedly spent about $200 million buying up shares in the open market in February 2005. But Shanda has since fallen on hard times: Its shares have lost roughly half their value, and many analysts believe the company will need to sell the Sina holding for cash to pay off a convertible bond in 2007. A Shanda representative could not be reached for comment. The buzz over a possible new Sina deal has attracted extra interest because of Sina's standout position in China's Internet market. It has one of the best-known brands, a big following among white-collar professionals and university students, and a fast-growing blog service. As the No. 1 news portal in China, Sina is a "very valuable Internet property" with "tremendous traffic," says Steven Xi, a Beijing-based managing director at The Hina Group, an investment banking and private equity firm.
Sina ranks seventh worldwide in Web traffic, according to Alexa.com. China's Internet market already ranks second only to the U.S., and over the past few years, market-watchers have mostly focused on its expanding user base. "The Internet in China is still a few years behind the U.S. in terms of monetization," says Xi. "But as the Chinese economy grows and consumer purchasing power grows with it, the monetization part will grow even faster than the user traffic." Sina is very well positioned to take advantage of that shift, he adds. So assuming for the moment that Shanda might be willing to sell its Sina holding, who would be a likely buyer? Tom Online is "probably the most interested in acquiring Sina," wrote Citigroup analyst Jason Brueschke in a recent note. A spokesperson for Beijing-based Tom declined to comment on acquisition talk. A similar rumor that Tom might be eyeing the Shanda stake in Sina made the rounds last spring. But Tom's short-term growth outlook and market cap collapsed over the summer as new wireless regulatory policies went into effect, and its weakened position would unquestionably complicate any acquisition efforts. Still, even if Tom couldn't acquire Sina outright, "it probably has the resources to acquire the Shanda/Sina stake," Brueschke said.
Others are skeptical, suggesting Tom may be too distracted by its own problems to want to take on an acquisition. Of all the wireless names, Tom draws the biggest portion of sales from mobile services, and so has been worst hit by regulations, points out Liu Bin, an analyst for Beijing-based telecom consultancy BDA. Sina, though it has a fast-growing online advertising business, also still draws a big portion of revenue from wireless value-added services. The latter category accounted for 42% of its sales in the second quarter of this year. "I don't think Tom would have the capability to buy Sina stock now," says Liu. "At this stage, most leading wireless-service providers are facing revenue declines, so they're focused on cost control and developing
their own new businesses." Tom isn't the only possible acquirer. Brueschke says other potential bidders for Shanda's holding in Sina might include Baidu ( BIDU), Tencent and Focus Media ( FMCN). (A foreign-controlled company probably wouldn't get Beijing's approval to buy into a major Internet firm like Sina, he says). "We believe that each of these three large, $2.5 billion-plus market-cap companies could very well be considering whether Sina is a strategic fit -- near or long term -- and what price they would be willing to pay for the Shanda-Sina stake," Brueschke wrote.
On the valuation side, terms might be influenced by another big Chinese-portal acquisition in August. Australian telecom firm Telstra paid $254 million -- regarded by some as a fairly healthy price -- to acquire 51% of privately held Chinese real estate site Soufun. "Telstra's acquisition of Soufun.com at a premium should lend support to the valuation of leading portals," observed Lehman analyst Lu Sun in a recent note. One factor likely to be of particular interest to potential acquirers is Sina's burgeoning advertising business. While many wireless names were getting trounced this summer due to a painful regulatory overhaul, Sina managed to keep a little Wall Street love by virtue of its strong ad revenue. In August, Sina management hoisted its outlook for online ad growth this year from a range of 25%-30% to 35%-38%. Ads could account for as much as two thirds of Sina's revenues by next year, up from 55% in the second quarter, according to Lehman, which has an overweight rating on the stock. But even if Sina looks like a smart property, it's not clear which of China's Internet players has the requisite money and gumption to buy into the portal just now.