On Friday the Israeli-based mobile gaming company, Playtika, submitted a revised proposal to Rovio’s board of directors in an offer to purchase the Angry Birds firm for about $800 million (€9.05/$9.82 per share, a 60% premium over trading). It came, ICYMI, mere hours after I predicted it would.
In November, Playtika had submitted an earlier, non-binding offer of €8.50/$9.23, suggesting that the Rovio advisory board rejected the initial proposal. According to one Wall Street analyst, the bid was “adequate” but expected it to go higher, up to €10/$11.87, given Rovio’s strategic value based on its well-known intellectual property. The firm’s board stated it was not in negotiations with Playtika but rather considering “whether and how” to proceed.
The deal makes sense for the acquirer. Playtika’s casual portfolio represents 55 percent of its 22Q3 revenue and the Rovio acquisition would add 42 million monthly active users and 6 million daily active users, assuming there is no pre-existing overlap. The question is whether a take-over bid makes sense for Rovio.
First, Playtika will need to reach a 90 percent threshold of shareholders to close the deal in accordance with Finnish take-over law. According to its most recent filings, Rovio’s ownership structure breaks down as follows.
Beyond the 77 percent it can buy from institutional shareholders (e.g., mutual funds, endowment funds) and strategics (who invest to gain a strategic advantage, for instance), Playtika will still have to buy out at least another 14 percent of individual retail shareholders. That presents a risk as, while they rifle through stock certificates to find enough of these individual investors, hedge funds may do the same to get their hands on shares and force Playtika to pay a premium to reach the necessary threshold.
Second, Playtika isn’t a spring chicken itself. In February 2022, the firm announced that it was “exploring strategic alternatives” which is finance speak for “we’re trying to sell ourselves.” Now, a year later, that hasn’t happened, which suggests that strategic investors and more traditional financial sponsors have looked at their books and passed on the opportunity.
Moreover, Playtika has a complex ownership dynamic. A single firm, AlphaFrontier owns 60 percent of its shares. Next, Ms. On Chau, who is an individual investor, owns another 23 percent, or about 81 million shares of common stock, through several holdings companies. This gives two shareholders an intense amount of decision-making power and may jeopardize Rovio’s creative independence post-acquisition.
And third, the mobile market for casual games isn’t what it was. With $1.3 billion on its balance sheet, Playtika has enough cash to close the deal but it also has a substantial debt load with a 40 percent debt/capital ratio. That may limit what it is able to accomplish in the period ahead, with consumer spending softening, app store mechanics worsening, and marketing costs increasing.
In effect, Rovio has been through the entire cycle of the mobile games industry. After being the posterchild for the early years of the smartphone, when it had the ambition of becoming bigger than Disney, it fell to the wayside even if it still managed to eke out an IPO based on the success of its box office movie release, only to report a 96 percent drop in y/y profits due to the costly investment in developing a 5G platform Hatch, and, finally, finding itself stuck between its reliance on the evergreen success of the Angry Birds franchise and an inability to produce another hit. Despite modest growth, Rovio acquired Ruby Games, a Turkish studio developing hyper-casual games, in pursuit of this emerging market. It means an acquisition is increasingly likely.
The deal is emblematic of the broader economics of mobile gaming. The popularity of mobile gaming has proven a double-edged sword for many mid-tier game makers. Despite strong demand, competition has gotten a lot more fierce and Apple’s push for greater control over its ecosystem has further exacerbated circumstances and rising marketing expenses. Well before the pandemic, the Finnish game maker was already having a rough time. Despite its well-known intellectual property, the rising costs of user acquisition depressed Rovio’s finances: in 2Q18 the firm acquired 35 million users at a cost of $26 million, or roughly 90% of revenues. In 3Q18 it spent $20 million, adding only 28 million users at about 70% of revenues.
It leaves Rovio with a tough decision: take the deal or hope for a stroke of luck that will catapult it back to the top of the ecosystem.