I’ve spent most of this week talking about the same thing:
What is Tencent going to buy?
Here’s why. According to Bloomberg, Tencent has been in talks with banks to raise a $6 billion loan. That’s a lot of cheese, even for a Chinese juggernaut. And Big T has been busy as ever, investing in 31 game companies last year that, and I can’t stress this enough, we know of.
Given the industry’s frothy ridiculousness (see GameStop below), it isn’t a bad idea in principle to fatten your warchest when the getting is good. Activision Blizzard, too, added a cool $1 billion in long-term debt to its balance sheet. So we have to also keep in mind that Tencent may just be doing what makes sense in a market where capital comes cheap.
Okay, so how much does $6 billion buy?
Well, that’s just the base. Tencent usually teams up with other firms to finance deals. As a rule of some of its deals break out in several parts. It can include a 20% loan, a consortium of other investors for another 30-50%, and rely for the remainder on its cash reserves. Quick maths tells you that Tencent is looking at a potential acquisition valued between $20 to $30 billion. That may just be enough to buy GameStop. Ha. I’m sorry. Couldn’t resist.
Before you list companies, consider these three questions
First, is this a game-related acquisition? Tencent is already the largest publisher in the world so it’s not looking to be bigger than everyone else per sé. But it could be an infrastructure play, too.
Second, is this assumed acquisition going to occur in Asia or somewhere else? Depending how you answer that, we can pair down the different candidates. Even Tencent’s money isn’t going to be accepted just anywhere.
Third, is this going to be a transformative acquisition, or business as usual? Considering how instrumental the right purchase can be in the success of an entertainment firm (think: Disney buying Marvel), we have to take into account whether it will elevate Tencent to a next level or merely fortify its existing business. Previous examples obviously include Supercell and Riot Games.
So here’s a summarized list (in alphabetical order!) of companies that people pointed out this week from their comfy seat in the Acquisition Armchair.
CD Projekt Red
Following its recent disaster, the firm’s value has taken a significant albeit temporary dip. Undoubtedly its share price will clamber back up once investors get to see earnings and forget all about the firm’s mismanagement of its most valuable asset, talent. That, in combination with the fact that it is not American and therefore avoids all the regulatory rigmarole, makes it a cheap acquisition target (Enterprise Value: $7.1bn, +4% y/y) for a firm that could very well turn things around in the next year if it manages to stop being stupid. The fundamental question is whether Tencent wants to deal with all that.
It would be quite the upset if a large Asian publisher would suddenly take ownership of the video game licenses for American football. Which is why it won’t happen. More likely is an offer from Amazon to get its hands on IP to build out its Luna business. We’ll see. But even then its EV of $38 billion (+34% y/y) seems prohibitive.
Since Tencent already owns 40% of Sweeney’s empire, it would seem a promising candidate. In particular its Unreal Engine would be valuable and perhaps more so than its impressive content catalogue. It also fits Tencent’s usual acquisition profile because of its infrastructure components. One complication would be the Epic/Apple fight, and I’d expect Tencent to just shut that down outright. It really comes down to what Tim Sweeney wants to do with the rest of his life. His ideological stance on the health of ecosystems, both forest and fun, means he needs to captain a big ship to make his point. That makes it less likely he’ll give up control over the bridge. During its most recent investment round in August 2020, Epic Games was valued at $17.3 billion (+15% from its previous round in 2018).
Not sure about this one. There was plenty of talk about the Nexon sale almost two years ago, but then, allegedly, its founder changed his mind and walked away from a $16 billion transaction. Since then its share price has more than doubled from $15 to $32, which means not selling was the right call. However, that makes Nexon only more expensive to buy now. And although the geo-political tensions between China and Korea have started to warm up it seems we are still several years out from a deal of such cultural symbolism. Today Nexon’s EV stands at $25 billion, +139% y/y.
I have no doubt that CEO Zelnick would welcome a record-breaking acquisition to cement his legacy as an American entertainment tycoon but it is not likely. With a few exceptions, Take-Two has not managed to break into the Chinese market. Its NBA 2K franchise does well there, yes, but what about Red Dead Redemption and Grand Theft Auto? A deal would give Tencent access to some premium IP but it is the type of content that isn’t necessarily adapted to the Chinese market. More so, there is no indication that the new Biden administration is going to drastically change its stance on American firms wholly owned by Chinese conglomerates, especially in an entertainment category. Take-Two’s EV sits at $21 billion (+73% y/y).
Tencent already owns 5% of the French publisher which it purchased to help it escape the clutches of Vivendi. Ubisoft also owns several interesting franchises and it would be a breeze to add a few of Tencent’s titles to the firm’s budding Ubisoft Plus subscription. With an EV of $13 billion (+42% y/y), it is in the right price range. Another valuable aspect is that Ubisoft is headquartered in Europe, which avoids the regulatory risk it runs in North America. What decidedly works against it is that like its colleague from Poland, Ubisoft is dealing with several internal issues.
There are plenty of obvious mobile synergies here. Under Gibeau’s leadership, the firm has performed really well: it traded at under $2/share when he joined in March 2016 and is now worth 5x as much. Today its EV stands at $11 billion (+119% y/y). The challenge is that Zynga has been struggling to trigger organic growth and instead has relied largely on acquisitions like the $1.8 billion purchase of Peak Games a few months back.
Nothing triggers speculation more than a big dog walking around with full pockets. And what struck me this week is that most of the people I spoke to assumed an acquisition of a gaming company. It may very well be that Tencent is eye-ing LINE, a Korean-owned subsidiary that is a leading internet search engine in Japan. Having put DouYu and Huya together to become the biggest live-streaming platform in Asia is focused on distribution more than on content.
So, I’m curious, what’s your take?
On to this week’s update.
🎙 Later today I'm moderating a talk between the CEOs of Niantic and Verizon Consumer
Ronan Dunne, CEO of Verizon Consumer Group, and John Hanke, founder & CEO of Niantic, will discuss 5G, AR Mapping, wearables, and the future of gaming. And I’m going to try and not hog the mic.
GameStop’s day in the sun
The only thing more abundant than the current speculation on GameStop’s share price is the financial mansplaining that’s going around.
The valuation is, of course, no longer related to the firm’s fundamentals. GameStop’s share price is now effectively a financial meta game in which millions of retail investors are fleecing institutional banks by trading in unison. It’s the metaverse, but not as we planned.
GameStop reached $350/share on Wednesday. By comparison, that is +464% higher than when it reached a historic peak of $62/share during the red hot height of the Nintendo Wii in December 2007. Perhaps it was sheer providence that I had a recent conversation about GameStop’s business model with Patrick O’Shaughnessy at Colossus.
Xbox 180 on price hike
After announcing a price hike for its Xbox Live service, Microsoft caught a bunch of flack and changed its mind. To their credit, it is the only appropriate response when you’ve committed a mistake. You say you’re sorry and over-correct. So now we’re getting free-to-play titles on the Xbox without needing Xbox Live.
It speaks to a broader trend that is going to play a big part this year: I’m not entirely convinced that all these digital services are easily navigable. Remember when HBO was just HBO, and then it was HBO Go, and then HBO Now, and then HBO Max? I think?
For consoles it’s starting to feel the same. PlayStation offers four different services: Now, Plus, Music, and Video. Microsoft has Xbox Live, Marketplace, Smartglass, Game Pass Cloud Gaming, Game Pass. And then there’s Nintendo Switch Online.
I understand the corporate need to spin off a bundle of services or content under their own sub-brand. PS Now and PS Plus are different offerings that build on a different set of agreements with third-party content providers, each of whom need to be compensated accordingly. But that’s product development in a vacuum. Stop creating SKUs.
Sony takes on the video streaming giants
Here’s an interesting read on Sony’s content strategy in a world dominated by video streaming platforms. The short answer: Anime. Valued at $24 billion, the market for anime is expected to grow to $34 billion by 2026E. The Japanese juggernaut has been making purchases across the value chain: in December it acquired Crunchyroll from AT&T for $1.2 billion, which dovetails with its purchase of 95% of US-based anime distributor Funimation in 2017 and the recent $400 million investment in one of the biggest live streaming platforms, Bilibili.
Different from Netflix with its massive global scale, Sony is formulating a flywheel all of its own. Its trifecta of music, film, and games offers a myriad of opportunities to engage audiences in ways that Netflix, Amazon, and HBO simply cannot follow. For example, Lil Nas X, one of Sony-subsidiary Columbia Records’ best-known rappers, recently garnered 33 million views for his performance in Roblox. It is early days, yes, but you can set your clock to more of these crossover experiments popping up.
The challenge lies in making it sing. So far, the cross-pollination between its different content silos has been poor. That has a lot to do with the way the firm has historically been organized. However, since his appointment, CEO Kenichiro Yoshida has been breaking down these barriers.
I’ve been a fan for years and have found an abundance of narratives and characters in anime that offer different story-telling than the conventional Disney lore. I’m stoked.
Another Apple VR device rumored
According to Bloomberg, team Cook is glacially developing a device that “will display an all-encompassing 3-D digital environment for gaming, watching video and communicating” but offers no AR functionality. I am whelmed.
Whenever I've tried VR, it's been exciting. Team SuperData (hi y’all!) has roughly the same timeline in its forecasts, which it attributes to “limited consumer use cases.” So I remain skeptical of its widespread appeal. What it all comes down to, as always, is a combination of novel experiences and a robust rollout.
Apple seems to be straying from its primary product categories into new territory. That makes sense for a consumer electronics firm. But it's trying too hard to be a luxury brand. Its $550 Airpods Max don't deliver enough juice to be worth the squeeze, and while it designs a good-looking set of speakers, do I really need a HomePod?
Look, I am 100% on board with the ‘bicycle for your mind’ stuff that Apple creates. But when it comes to VR I fear we can mostly expect Apple to steal Google's coveted title of premiere glasshole maker and become the primo provider of out of reach and out of touch technology. What am I missing?
MONEY, MONEY, NUMBERS
Huuuge, maker of social casino games filed its IPO to the tune of $150 million in Warsaw. According to its documents, the firm’s revenue has a CAGR of +31% for the period from 2017 ($152M) through 2019 ($259M), when it generated, and an EBITDA increase from $4.3M to $25M. The nine months ending September 2020 yielded $244 million in revenues (+30% y/y for the same period) and an EBITDA of $54 million (up from $9M). Unsurprisingly, the firm plans to use the proceeds to beef up its catalogue and make non-casino games. Across its titles, Huuuge counts just under one million daily and 4.7 million monthly actives.
UK-based Team17 acquired Golf With Your Friends for £12 million ($16M). After an initial partnership in 2019, Team17 hopes to “create additional opportunities to extend the life cycle of the existing game”by absorbing developer Blacklight Interactive. The firm had previously acquired Yippee Entertainment in January last year for £1.4 million ($2M), and Mouldy Toof in 2016 which coincided with a raise of £16.5 million ($23M).
Web-browser maker Opera acquired YoYo Games for $10 million. The firm’s GameMaker Studio 2 game engine has been downloaded 10 million times since 2012, which doesn’t exactly make it the biggest fish in the pond but I am curious to see whether Opera can offer something novel and accessible. Link
The Carlyle Group has acquired Jagex for an undisclosed fee. Okay, so no recent numbers here. But it is the third time that the Runescape-maker has changed hands in the past five years. In 2016 Fukong Network acquired Jagex for $230 million and sold it for $530 million to Macarthur Fortune Holding in 2020. According to one source, it was sold for at least that amount this time.
Microsoft reported $5 billion in gaming revenue (+51%) for the quarter. It also disclosed that Game Pass now has 18 million subscribers, which is a bit lower than expected. Microsoft reported $2 billion in revenue from 3rd-party content this quarter, 100 million Xbox Live Monthly Active Users across all devices, and the best launch month for Xbox console.