TOM Online may sell stake in Indiagames

MUMBAI: Chinese gaming company TOM Online is looking to sell its stake in Mumbai-based Indiagames. TOM Online holds 62% stake in Indiagames and has been looking for an exit. The new investor is expected to pump in $25m in the company. If Indiagames finds a buyer, it will be the largest investment in the fledgling Indian gaming industry.

Due to the valuation and the size of TOM Online’s stake, none of the local venture capital funds are interested in picking up the stake. The management along with the young founder Vishal Gondal has been scouring the market for an investor.

Company officials claim they will announce the strategic investment within a week’s time. When contacted, Mr Gondal admitted a strategic investor was interested in the company. Sources say a media company has evinced some interest in buying the stake, but it could not be confirmed.

TOM Online is exiting its investment as its business in China has slowed down and it seems to have given up plans for expanding into India. The Chinese gaming company has been witnessing a slowdown in its revenues and profits. For the quarter ended September 30, TOM Online’s revenues have come down by 15.9% to $38.95m and net profit plummeted by 55.1% to just $5.28m.

According to Wang Lei Lei, chief executive officer, TOM Online, the company’s third quarter operating efficiency and performance was affected by the change in Chinese government policy and competition in the online gaming market.

Indiagames had approached big VCs like KPCB, Sequoia and Canaan Partners for funding but the deal didn’t come through because the valuation of the company was too high, say sources. Mr Gondal denies approaching any VC fund, “We are not a start-up company, we are the largest gaming company in the India, so we need growth capital and not VC funding.”
Mr Gondal claims the management team will also increase its stake with the new strategic investor.

Indiagames was started in 1999 and was initially funded by Infinity Venture Capital and IL&FS. In ’04, Infinity and IL&FS sold their 80% stake in the company to TOM Online for around $18m, this included the buyout and additional funds for the company.

In the second round the enterprise value of Indiagames was pegged at $22.5 m The third round of investment was done by Cisco and Macromedia (Adobe).

They jointly invested $4m in April ’05 to pick up a 18.2% stake. TOM Online’s stake came down to 62.4% and the enterprise value of the company was pegged at $22.2m.

Indiagames has been developing games for international game publishers and is trying to establish a brand identity in India. The additional funds are expected to be used for its recent initiatives like ‘Game on demand.” Indiagames has formed partnerships with telecom service providers like Bharti Airtel, MTNL, VSNL and cyber cafes to launch online gaming services.

The Indian mobile gaming industry is experiencing rapid growth, though on a very small base. The total size of the Indian gaming industry was around $50m in ’05.