By Aman Sharma, Gustaf Baavhammar, Christopher Lewis, Richard Isbister, Peter Moravec (London Business School)
Overview of the deal
Key Update (14/12/2020): Since publishing this report, Electronic Arts (NASDAQ:EA) has launched a rival bid totalling £945 billion for Codemasters, an all-cash offer of 604p per share. Codemasters’ board has since withdrawn its recommendation of Take-Two’s original offer and instead has recommended Electronic Arts’ counter-offer to its shareholders. Codemasters’ shares jumped 22.8% over the weekend following the announcement to ~656p, indicating that the market expects a bidding war to escalate.
Acquirer: Take-Two Interactive Software (NAS: TTWO)
Target: Codemasters Group Holdings plc
Implied Equity Value: £759 million ($994 million)
Total Transaction Size: £708.916 million (-£50.084 million Net Debt)
Closed date: 31st March 2021 (Expected)
General Advisor to Acquirer: Goldman Sachs
Legal Advisors to Acquirer: Axinn, Veltrop & Harkrider; Harbottle & Lewis; Van Bael & Bellis; Willkie Farr & Gallagher
General Advisors to Target: Liberum; Jefferies International
Legal Advisors to Target: Gowling WLG; Reed Smith
After a very strong 9 months for the gaming sector amid the global stay-at-home mandate, Take-Two has agreed to acquire Codemasters in a cross-border deal offering Codemasters’ shareholders the following in exchange for each common share they hold:
120 pence per share cash offer
0.02834 common shares of the combined entity
Overall, this offer values each Codemasters share at £4.85 per share at an implied equity value of £759 million.
While Take-Two is still conducting due diligence on the company ahead of the takeover, it believes that it can unlock additional value by combining Codemasters’ prominent portfolio of racing video games with its global distribution network and core operating expertise in analytics, product development and marketing. Furthermore, Take-Two will hope to realise synergies by enhancing its own sports portfolio under the 2K brand, with titles such as NBA basketball and PGA golf. While some major video game publishers like Electronic Arts and Activision Blizzard have hinted that the pandemic’s boost for gaming may be starting to fade, Codemasters’ fundamentals are still very promising. The company recently signed an exclusive five-year deal with the World Rally Championship and achieved 100% year-on-year revenue growth* after three well-received title launches, including its most successful F1 release to date.
“Codemasters has a renowned history of creating some of our industry’s most beloved and commercially successful racing franchises, and we believe that their offerings will be highly complementary to our sports portfolio and enhance further our organization’s long-term growth.” - Strauss Zelnick, CEO of Take-Two
*For the six months up to 30th September 2020
Company Details: Acquirer – Take-Two
Take-Two is one of the largest independent video game publishers, operating the two labels Rockstar Games and 2k. Headlining their portfolio are the franchises “Grand Theft Auto” and “NBA 2k” that have sold hundreds of millions of units worldwide.
Founded in 1993, headquartered in New York, USA
CEO: Strauss Zelnick
Number of employees: 5,800
Market Cap: $20,026,928,791 (as of 26/11/2020)
EV: $18,546,069.8 ($1,480,859 Net Debt)
LTM Revenue: $2,639,412,000
LTM EBITDA: $959,502,000
LTM EV/Revenue: 7.03x
LTM EV/EBITDA: 19.33x
Company Details: Target - Codemasters
Codemasters is a leading British publisher of racing video games such as the official Formula 1 franchise. The company is currently traded on the LSE Alternative Investment Market and has had a range of previous owners including the Indian conglomerate Reliance Group and the leading British Venture Capital firm Balderton Capital.
Founded in 1986, headquartered in Southam, Warwickshire, UK
CEO: Frank Sagnier
Number of employees: 740
Market Cap: £750,681,483 (as of 27/11/2020)
EV: £700,597,483 million
LTM Revenue: £116,775,000
LTM EBITDA: £54,844,000
LTM EV/Revenue: 6.43x
LTM EV/EBITDA: 13.69x
Projections and Assumptions
Short-term consequences
With the existing distribution channels, the ongoing development of new titles, and strong existing portfolios of both companies, the acquisition should lead to immediate benefits for the bottom line in the coming year. Due to the pandemic-driven stay-at-home mandate, there has been a subsequent boom in the sales of video game entertainment this year with consistent year-on-year increases in sales every month since March. This is expected to continue into the near future as vaccines await approval and households approach the Christmas period, typically the time of the year where electronic entertainment sees its highest sales. The portfolio of AAA-rated titles that have now been combined, also coinciding with the release of the PS5 and Xbox Series X, will see this demand remain strong in the coming months. The increasing popularity of media streaming platforms such as Twitch and YouTube Gaming have been additional catalysts for the growth of the gaming market.
Through this acquisition Take-Two will expand their portfolio to include racing games, further diversifying their consumer base and enhancing revenue while achieving cost synergies by streamlining back-end functions such as finance, legal, and HR. With both Boards of Directors approving the transaction, the acquisition is expected to close by 31st March 2021. As such, we expect that within Take-Two’s upcoming financial year ending in March 2022, we expect to see a realisation of synergies as the expanded title portfolio benefits from the combined group’s superior development and marketing capabilities. Although the immediate market reaction to the news was rather muted, shares in Take-Two and Codemasters since 10th November have soared 16.5% and 11.7% respectively.
Long-term Upsides
Codemasters have been creating the official F1 video games since their first release with their title “F1 2010”. During the recent lockdown, video game interest, and in particular racing games has spiked with viewership for racing games on Twitch, a video site focusing primarily on live stream video game events, recording an increase in live hours watched during events from 700k to 1.6M from February to March 2020. This surge in demand comes to no surprise for F1 fans who frustratingly saw their first race of the 2020 calendar in Melbourne cancelled and are now looking for an alternative. The F1 community has responded to this, creating their Virtual Grand Prix series. Codemasters have successfully capitalised on this shift from real to virtual racing by enticing fans and having young prodigies Charles Leclerc of Ferrari and Lando Norris of Mclaren making regular appearances playing their F1 titles. Team principal of Ferrari Mattia Binotto has said that eSports is now recognised under the Ferrari Driver Academy program. It is clear this shift to sim-racing is permanent and Codemasters have a competitive advantage through their licensing rights to distribute their official F1 titles. Through this merger, Take-Two is acquiring a firm that is at the forefront of sim-racing and adding their titles to their library of sports games will solidify their position in the video game market.
Risks and Uncertainties
Despite the acquisition offering several short- and long-term strategic benefits, there are still several risks to be considered. Although both boards have given the green light, we cannot rule out the potential for either a renegotiation of the offer price or a hostile bidder entering the equation. The primary reason for this could be the fact that the acquisition premium on the pre-announcement date was just 11.5%, surprisingly low given the highly strategic nature of this deal. Moreover, since the announcement Codemasters’ share price has already surpassed the offer price. Given its strong top-line growth trajectory of 100% year-on-year, its share price may still significantly increase ahead of the expected transaction closing date. This would undoubtedly cause complications for Take-Two as Codemasters’ shareholders might feel there will be value left on the table if there is no revision to the offer. [As of 14th December 2020, we understand that EA has already launched a counter-offer that Codemasters' board unanimously recommends.]
In the likely case that the deal does go through, the two companies might face difficulties integrating their corporate cultures which are typically less standardised in the gaming industry and especially given the geographic separation between the companies. However, we do not expect this to be a significant issue given Take-Two intends to retain the current management of Codemasters, the manageable time difference between the UK and New York as well as the commonality of the English language across the companies.
Finally, since gaming has seen a substantial uptake during the COVID-19 pandemic, the development of new vaccines and a return to a more “typical” way of living might severely hinder the growth of sales for these companies. People will likely be enjoying their newfound freedom away from their “Zoom meeting and Netflix devices”, which is not the ideal business environment a gaming company wants to be facing after an acquisition.
“Some publishers, including Electronic Arts and Activision Blizzard, have suggested the pandemic’s boost is starting to wane.” - Time Bradshaw, Financial Times