Tencent can win with a $9 bln bet on Supercell

June 10, 2016

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.

Tencent’s play for Supercell could produce a victory. The Chinese gaming and social networking giant is reportedly in talks to buy the maker of mobile hit Clash of Clans at an unexpectedly high $9 billion valuation. Such a big deal would be a first for Tencent. But buying the Finnish games-maker could pay off – if Supercell can keep churning out the gems.

Potential suitors from China have been reportedly circling SoftBank’s 73 percent stake in Supercell for weeks. The price tag for the entire company was north of $5 billion, Bloomberg reported on May 14, citing someone familiar with the matter. Now, the news wire says Tencent is mulling a deal that would value Supercell at $9 billion.

That looks pricey. At 9.5 times Supercell’s 2015 EBITDA, that’s substantially more than the 6.4 times that Activision Blizzard paid for King Digital, the maker of the mobile hit Candy Crush Saga, last year. Mobile gaming is notoriously hit-driven, so it can be hard to justify big multiples. Look at Supercell’s compatriot, Rovio Entertainment, which has struggled to replicate the success of Angry Birds.

China’s $214 billion web behemoth could nonetheless unlock a good return. Supercell doesn’t break out operating profit, but assume operating margins are 1.5 percentage points lower than EBITDA margins, roughly in line with King Digital. Back out Finland’s 20 percent corporate tax rate and Supercell’s net operating profit after tax (NOPAT) last year would be a shade under $730 million.

Analysts at BNP Paribas reckon Tencent’s cost of capital is about 9 percent. So generating a higher return on acquisition from a $9 billion takeover of Supercell would require NOPAT to increase by 11 percent this year, Breakingviews calculations suggest. That should be achievable, given Supercell’s EBITDA soared 65 percent last year. And the game developer just released its fourth game, Clash Royale, which is already proving to be a hit. If the combined group can cut costs, or boost sales, those benefits would further increase the deal’s return.

Tencent has traditionally stuck to buying much smaller minority stakes. It is now playing a riskier but potentially more lucrative game.


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