M&A Alert—June 20, 2017
Modern Times Group acquires online and mobile gaming portal Kongregate for $55 million.
Author: Steve Payne & John Ascher-Roberts
Transaction Size: $55mm
On June 20, 2017, Sweden’s Modern Times Group (OM:MTG B) announced an agreement to acquire online and mobile gaming portal Kongregate, a subsidiary of GameStop (NYSE: GAME), for $55 million.
Kongregate has traditionally been an online gaming portal offering free-to-play games through revenue-sharing partnerships with independent game developers. Since being acquired by GameStop in 2010, the company has expanded to offer both mobile and Steam games, and has also moved into game development via its acquisition of Ultrabit, the San Diego-based games studio behind “Office Space: Idle Profits”, in 2016. It now has more than 100,000 games on its browser platform and more than 45 games on mobile app stores, with over 100 million mobile downloads to date. The company attracts 14 million monthly active users, and grew its net sales (after rev share payments to developers) by 38% in 2016 to $35 million, which the company expects to grow to $50 million by the end of 2017. Competitors include AddictingGames, Miniclip, Mousebreaker Shockwave, and Zynga. Projected 2017 EBITDA is 10 percent.
Brother and sister Jim, former CEO, and Emily Greer, current CEO, founded the San Francisco-based company in 2006. The company received $9 million in funding from Bezos Expeditions, Greylock Partners (James Slavet), Joe Kraus, Reid Hoffman, Richard Wolpert and SoftTech VC (Jeff Clavier) prior to being acquired by GameStop in 2010 for $38.1 million, according to GameStop’s 10K. Kongregate has 80 employees.
GameStop’s sale of Kongregate continues its rapid diversification beyond video games.
Founded in 1987, Modern Times Group (OM: MTG AB) is the leading digital entertainment company in Sweden. It is comprised of four business units: Nordic Entertainment, the online and offline free-TV and radio group, International Entertainment, online and offline operations in the Czech Republic, Bulgaria and Baltic states, MTG Studios, the production studio of original TV and film content, and MTGx, the next-generation digital entertainment division. The company has been traditionally focused on offering free-TV, subscription TV, and commercial radio, and producing its own content through MTG studios, before launching MTGx in 2013. MTGx focuses on three digital entertainment verticals: Esports (MTG acquired 74% of ESL, the world’s largest esports brand in 2015), digital video networks, and online games through its recently acquired InnoGames subsidiary. MTGx is MTG’s fastest growing division with revenues increasing 194% from 2015 to 2016.
Based in Stockholm, Modern Times Group has a market capitalization of $2.3 billion and LTM revenues of $2.0 billion.
MTG is acquiring Kongregate for $55 million in cash.
Transaction Value: $55M
TV / 2016 Net Sales 1.6x
TV / 2017E Net Sales 1.1x
Comparable transactions include Supercell’s acquisition of a majority stake in Space Ape in May of 2017 for an equity value of $90 million (1.0x LTM revenue, covered here), MTG’s acquisition of a majority stake in InnoGames at an equity value of $284 million (1.9x 2016 revenue), Jam City’s acquisition of TinyCo in July of 2016 (undisclosed), Tencent’s acquisition of Miniclip in February of 2015 (undisclosed), Churchill Downs’ acquisition of Big Fish Games in November of 2014 for $835 million (2.7x LTM revenue, covered here), and Disney’s acquisition of Playdom in July of 2010 for between $563-$763 million (11.3x-15.3x 2009 revenue, covered here).
Kongregate has a very strong business intelligence/analytics team, and a good track record of taking indie games and maximizing revenues by fine-tuning gameplay and monetization. In addition to strong product skills, Kongregate is very good at marketing their games through a variety of channels, particularly in the U.S. (Innogames is stronger in Europe). And finally, Kongregate can serve as a platform for MTGx to place additional bets on innovative game developers. This will allow them to build upon their earlier acquisition of InnoGames with a stronger portfolio of games and developer talent, and give them the opportunity to capture a larger piece of the $100 billion dollar gaming market.
Architect Partners’ Observations
This transaction shows a clear progression in MTG’s growth strategy:
- The acquisition of esports leader ESL in 2015 was not a stretch for the MTG Board to support, given that it was close to their broadcasting roots.
- The Innogames acquisition was a logical progression, made more comfortable by the fact that the target was based in Hamburg. Even so, MTG still made this acquisition in two steps.
- Kongregate, based in San Francisco, is a step further afield, but the MTG acquisition team knew the company and the transaction appears to be a good cultural and business fit.