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A web games company is about to test the appetite for Chinese floats in the US in one of the first such deals since the accounting scandals that rocked many Chinese companies in 2011.
7Road.com is the games subsidiary of Changyou.com, a Chinese online game developer that in turn is majority-owned by Nasdaq-listed Sohu.com.
While an application for a Nasdaq IPO is not yet publicly filed, it is described by bankers as “potentially imminent”.
One said: ” You’ll have noticed the current volatility in markets, and like all these things there’s a reserve price in the minds of sellers and they need to be comfortable with valuations. But it’s at a pretty advanced state of preparation.”
The deal is unlikely to be large – “early triple digits,” according to the banker, meaning something in the range of $100m-$400m.
But it is significant in being a rare attempt to bring a Chinese company to a north American listing since the accounting scandals around Sino-Forest, a Toronto-listed Chinese company, and others in 2011. In 2012 only two Chinese companies were listed in the US, Vipshop and YY.
However, both of those deals have performed extremely well, suggesting there may be selective appetite for more listings.
The banker said: “There is not a broad market for it. But it is hugely advantageous in this situation that you are talking about a carve-out from an existing public company, which to an extent is going to mitigate any greenfield governance concerns.”
He added: “But I’m not going to pretend that the market for early-stage TMT China companies in North America is a straightforward one. The accounting firm inquiries, SEC litigation, the Muddy Waters instances [a reference to a fund management company which has alleged many accounting irregularities in Chinese companies] – all of the above have contributed to a pretty tough operating environment for those types of deals.”
The point about the carve-out is likely to be crucial. Sohu.com is widely held by major institutions including Wellington, Handelsbanken, Fidelity and Invesco, which may give investors comfort in investing in a subsidiary.
Citigroup and Credit Suisse are managing the IPO.
