China's second largest online game operator, Shanda Interactive Entertainment Ltd, will sell almost 40 percent of its stake in the Internet portal Sina Corp for US$99.11 million.

The sale will narrow the scope of Shanda's investment and free up cash aimed at shaping up its lacklustre financial performance.

Shanghai-based Shanda said yesterday in a statement it would sell some 3.70 million shares of Sina to Citigroup Global Market Inc for US$99.11 million, while keeping the rest of its 6.12 million shares, about 11.4 percent of Sina's outstanding shares.

The transaction is expected to conclude on Thursday.

Shanda spokesman Zhuge Hui said Sina's investment will remain a major part of the company's growth strategy, but declined further comment.

The American depository share of the second largest online game operator on the NASDAQ Stock Market rose by 1 percent from US$15.34 to US$15.50 in after-hours trading, while Sina's fell slightly from US$27.90 to US$27.88.

"It is a good time to sell some of the stakes," said Peter Lu, a senior Internet analyst with China IntelliConsulting Ltd in Beijing.

The sale allows Shanda to benefit from the rise of Sina's stock prices, while maintaining considerable influence on the Beijing-based Internet portal.

Since August, Sina's share price has risen from US$20.23 to US$27.90 with strong performance of its online advertising business.

In February 2005, Shanda said it acquired 9.82 million shares of Sina, the top Internet portal in China, at a cost of US$230 million through several open market acquisitions. With the move it became Sina's largest investor with a 19.5 percent stake.

The acquisition was a key step for the then top Chinese online game operator to work toward an online media network like Disney.

Shanda, which has significant leadership in the online game market, is trying to extend its presence from online games to an entertainment empire on the Internet, mobile phones and TVs.

Sina is the second most influential news and entertainment site in China after the national broadcaster CCTV and it's holdings were highly distributed. Taking a minority stake in Sina allowed Shanda to control a valuable content asset at a low cost.

However, Sina's board thought the move was a stealth attack to take over and launched a poison pill, which allowed other investors to purchase Sina's shares at half price if Shanda boosted the holdings to 20 percent.

Meanwhile, Shanda began suffering heavy financial blows due to regulatory control of Internet protocol TV, slow progress in new services, the decline of its flagship games, and fierce competition in the market. These factors caused Shanda's revenues to fall year-on-year for four consecutive quarters.

Now, returning to growth is a top priority for the Shanghai firm, especially since it's expected to announce third quarter financial results on Thursday in the United States.

In October 2004, Shanda issued US$275 million convertible notes at an estimated price of US$39.70 per American depository share, which is redeemable from October 15, 2007.

The urgency to improve its financial performance and the pressure of the possible need to redeem its US$275 million convertible notes make it necessary for Shanda to get some cash.

At the end of June, the online game operator had cash and the equivalent of just US$130 million, said Lu.

(China Daily November 8, 2006)