Keywords Studios PLC (AIM:KWS, OTC:KYYWF) paid a “much higher” multiple for the new acquisition of Helpshift but the group has “rarely bought anything with the potential to grow at this rate”, said Barclays.
The bank reiterated its ‘buy’ rating, with a share price target of 3200p, versus the last close price of 2,828p, after the AIM-listed company yesterday agreed to snap up consumer-facing digital support platform Helpshift for an initial US$60mln and up to US$15mln more in cash and shares over two years.
Barclays said the deal looks “strategically sensible”, though higher acquisition multiple than Keywords typically pays the analysts wrote, noting that for game development purchases the company has typically looked to spend in the low double-digits of EBITDA and for some other models in the single digits.
“But SaaS models do not come cheap and Keywords has rarely bought anything with the potential to grow at this rate.”
The San Francisco-based outfit is to be integrated with Keywords' existing player support business, building on an existing work the two companies have done together with many clients, which “should enable Keywords to deliver a more flexible player support offering, with the customer choosing the mix of automation and real world contact”.
Revenues of circa US$20mln are expected this year, with adjusted earnings (EBITDA) of around US$2mln, and expected to grow strongly in 2023 and beyond, with projected EBITDA of US$8mln by 2024 implying 52% revenue growth for the next two years, the analysts calculated.
The deal will be paid for using company cash and “still leaves net cash afterwards, assuming our modelling is correct”, the analysts said.
Further assuming 2% earned on the cash paid and a depreciation and amortisation of 5% of revenue, then the deal would theoretically be circa 3% accretive to 2024 estimated adjusted earnings per share, all else equal, the analysts said.
“Keywords shares did not react well to the original deals that got them into the player support area, because it was seen as somewhat commoditised. Growth has been strong in this line though, apart from a wobble in 2019.
“We agree that this area does not feel as defensible as some part of the Keywords business, but it does make sense that Helpshift can improve their competitive positioning.
“Overall, a deal at a high multiple may raise some concerns for investors who have always looked for multiple arbitrage in Keywords’ acquisitions. But the Helpshift deal does look like it could generate revenue synergies,” the analysts concluded.