'This is no bubble': Investors react to $1.5 billion Supercell deal
Valuation is accurate, but why is the studio selling?
With 24 hours having passed since SoftBank and GungHo Online announced they would be purchasing a 51 percent stake in Finnish developer Supercell, the investment community is beginning to offer its take on the deal.
According to Malte Barth, entrepreneur and advisor at Runway Capital, while the motivation behind Supercell's decision to sell a major stake in its company are arguably unclear, the figures involved are entirely logical.
"It looks like the valuation is over four times revenue," Barth told us.
"That's certainly a valuation on the higher end of the range compare to comparable assets in the mobile games category, but at the same time, this looks like a control investment, which typically involves a premium.
"On top of that, I see a pattern - Asian groups are coming in stronger to play a role in the games disruption in the west, so I don't exactly see this as a 'bubble'."
Two for one
What's more, Barth added, Supercell has "two blockbuster products on a global scale" on its books, which justifies a premium price.
But what about SoftBank's decision to partner with Japanese developer GungHo – best known for Puzzle & Dragons - for the deal? Why didn't the telecommunications giant go it alone?
"My take here is, that there are quite significant synergies between GungHo and Supercell that sweeten the deal," added Barth.
"Given the strategic cooperation between the two - announced in June this year - there is real evidence for this synergy's potential. Also for Softbank, having its fingers in the pies of three blockbuster games makes an attractive investment story as a whole."
For both SoftBank and GungHo, Barth added, to take a slice of Supercell at this stage offers the chance to "facilitate gaming disruption in the West."
"The question to my mind is more, why would Supercell do a deal like this? Supercell is strong in development, performance and is cash-rich, so you have to ask why it's doing a deal that, after all, gives up control," questioned Barth.
"It might feel like a defensive move – is the company de-risking? And if so, why?"
For Tim Merel, managing director at Digi-Capital, the important aspects of the deal "make sense", thanks in part to the "complementary strengths of the three companies geographically."
"It's also worth keeping in mind that this isn’t an outright acquisition, so the secondary sale of shares earlier in the year set the precedent for partial exit by investors and management," added Merel.
"This allows everyone to retain upside - particularly given the strategic combination - while also reducing investment risk by taking cash off the table now. The remaining management shares could also be argued to be an ongoing incentive, even though they might be feeling pretty comfortable after the deal."
Indeed, for Barth at Runway Capital, the decision to take investment rather than fully rely on an initial public offering (IPO) makes sense, given the "Zynga investment story was not exactly helpful to investor confidence in the public market."
"This is a burden the industry has to live with for now," added Barth.
"In general, games remains a hit-driven business, which does not exactly match with the needs of publics market investors. So I am not a big fan of IPOs for games developers in general and therefore would prefer the Supercell exit route.
"Hopefully King will proof me wrong, because I wish it the best of luck with its route."
Heading for the exit?
Specifically looking at Supercell, however, is the investment by SoftBank and GungHo actually an exit strategy at the top of the developer's business?
"Time will tell," he concluded.
"In general, you would never give up control in a business if you would want to run it long term independently. So, yes, this feels like an mid term exit route. At the same time, there is still significant up-side in the business for the Supercell shareholder."
That's an up-side that's being shared by the mobile games industry at large, Barth concluded, claiming that the 'slump' it was perceived to be in has now passed "given these exit-type of numbers."
"I cannot see a peak in this, as most of the mobile growth is still to come," he said. "We are maybe half way the max."
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