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The failure last week by Linktone, a Shanghai-based mobile value-added service provider, to buy Britain's struggling Monstermob Group ironically highlights risks overseas companies face in buying into the mainland wireless sector.

Monstermob, opting for less cash than Linktone offered, chose to enter a partnership with Spanish internet company LaNetro Zed.

The British company said  LaNetro Zed's gbp34 million  (HK$521.16 million) cash offer would solve Monstermob's cashflow problem.

Monstermob's troubles started in 2005 when the developer of mobile-phone products such as games and ringtones  bought three Chinese companies to get into the mainland wireless market.

'It paid a ridiculous amount for those companies and now it has to pay the price,' a source said.  'Those companies' earnings were inflated and revenue forecasts overstated.'

Monstermob paid about US$100 million in August 2005 for ATOP, saying it was the third-largest independent provider of mobile content on China Mobile's information and entertainment portal, Monternet.

ATOP  had doubled its subscribers to 1.24 million in June  that year from 650,000  in December 2004, while earnings before interest, tax, depreciation and amortisation grew to US$800,000 from US$400,000.   Monstermob valued the company at 10 times its Ebitda and considered it a good deal.

Monstermob's management probably did not realise where the growth came from. Rather than declare real customers, many mainland wireless valued-added service providers simply buy their own services, said Jin Hui,  an analyst at Beijing-based researcher Analysys.

'They are doing it to improve their ranking with Monternet,' said Mr Jin. 'The ranking  determines everything - if their services are not in the first two pages, no users will notice them and subscribe to them.'

Monternet rankings are decided by factors including total revenue generated and number of new users. In order to  push up their service rankings, valued-added service providers  dial up China Mobile on pre-paid phone cards and use their own services.

China Mobile keeps 15 per cent and pays the  rest back to the  service provider.

'For certain services, such as WAP, caller ringback tones and Java, this is a cost of running the operation. Their channels for promotion are very limited. Every service provider does that,' said Mr Jin.

Things can get more sinister when a potential acquisition is involved, said Mr Jin.

'The seller firm might just want to  push up its valuation, by pretending  it has a larger subscriber base and earnings growth,' he said.

Moves by China Mobile in June last year to protect users  further hurt Monstermob, which at the time  had most its growth from the mainland. The company issued three profit warnings and its shares slumped.

Meanwhile, its cashflow was not enough to meet liabilities it built up in acquiring the Chinese firms.  In June last year,  it had a GBP38 million  debt due within a year and just GBP9.8 million in cash.   On Friday, when Monstermob agreed to the partnership with LaNetro Zed, Linktone's bid would have valued the company at 72 pence a share against LaNetro Zed's 50 pence.

'Considering every aspect, our bid is superior,' Linktone chief financial officer Colin Sung  said.

Mr Sung said Linktone would continue to watch developments at Monstermob.



Mainland risks on show in Linktone's failed British bid