What’s happened?
Sony Group Corp (NYSE:SONY) has agreed a US$3.6bn deal to acquire Bungie (read more) as the so-called console war between PlayStation and Xbox continues to be fought at the deal table.
In the wake of Microsoft Corporation (NASDAQ:MSFT)'s US$69bn capture of Call of Duty owner Activision Blizzard last month (read more), Sony’s PlayStation has bought the studio behind Halo, Xbox’s most iconic game franchise.
Take-Two Interactive Software Inc (NASDAQ:TTWO), which publishes Grand Theft Auto and the 2k sports franchises, acquired Zynga (read more), creator of Farmville and Words with Friends, for US$12.7bn on 10 January.
Closer to home, here in the UK, Chinese-owned Tencent Holdings Ltd, the investors behind Fortnite, agreed to acquire Sumo Group PLC (AIM:SUMO) for US$1.27bn (read more).
Earlier in 2021, Electronic Arts Inc - the publisher of the popular FIFA and Sims franchises bought game developer Codemasters for US$1.2bn (read more) to acquire the F1 game franchise along with a catalogue of other racing titles.
Why it matters …
After soaring through the pandemic as stay-home-and-play demand saw a fresh boom in gamer numbers, the trend towards widespread adoption of mobile gaming and VR accelerated thanks to the burgeoning user behaviour amidst lockdowns.
At a corporate level, the video industry is also heating up with a huge spike in deal-making in the first month of 2022.
Console peddlers Sony and Microsoft, which both invested heavily with new generation consoles landing in the first year of Covid, are locked in some form of arms race, with each seeking to one-up the other at the deal table.
There are a lot of moving pieces here.
Microsoft’s US$69bn capture of Call of Duty maker Activision struck fear that Xbox could become an exclusive home to the AAA franchise, whilst Sony’s cheaper US$3.6bn retorts through the acquisition of 2007 Microsoft spin-out Bungie seemingly sets up what is increasingly looking like an IP cold war (leaving both operating under the threat of mutually assured exclusivity, if you will).
At the same time, crypto (play-to-earn gimmicks) and the much-hyped ‘metaverse’ futurism see capital funnelling into an ‘on-trend’ industry that maintained strong cashflows throughout the pandemic is evidently appears ripe for consolidation.
“The covid-related influx… is being followed by cash into metaverses/play2earn, driving increased game launches which are exacerbated by the arrival of covid-delayed product, and wage pressure,” Jeffries, investment banker, said in a note.
What it means for UK shares
Two UK listed game developers were bought out last year, Codemasters and Sumo Digital, and today three others remain as ways for investors to play the gaming industry.
Industry services and outsourcing group Keywords Studios PLC (AIM:KWS, OTC:KYYWF) presents another avenue for investors though it works to contract and doesn’t develop its own content (read more).
Keywords is no stranger to a takeover, having spent several years growing acquisitively with a buy-to-build strategy.
It leads the games services sector providing B2B and outsourcing across art and sound production, test and quality control, to customer-facing services and support on behalf of its clients.
The company has contracts with most of the major game studios and a diverse pipeline.
It has not yet guided investors on what the current round of consolidation means for investors, though at the very least it lead to a reorganisation of the outsourcers address book!
The London-listed game developers are:
Team17
Team17 Group PLC (AIM:TM17), the indie games developer, has already acquired indie publisher The Label, Hell Let Loose, and astragon Entertainment this year for a total consideration of approximately £130mln, to strengthen its IP portfolio.
The Worms publisher is valued at £1.03bn and has labelled six new games as “coming soon” on its website.
“The recent trading updates suggested TM17 has enjoyed a good FY21, and the three acquisition announcements in just two weeks since 2022 provided a good start for the year,” Jeffries added.
TinyBuild
Similarly to TM17, tinyBuild Inc (LSE:TBLD) offers exposure for investors to a large portfolio of indie games but differentiates on its low-cost base in Central Eastern Europe.
TinyBuild Inc, which has a market capitalisation of £394mln, has acquired Versus Evil for US$31mln, We’re Five Games, Hungry Couch, Moon Moose, Animal, and Bad Pixel in the last 12 months.
Frontier Developments
Frontier Developments PLC (AIM:FDEV), Jurassic World Evolution developer, languished behind its rivals in terms of acquisitions but reported record results last year as it prospered from gamers staying home during COVID-19.
The company, which is valued at £525mln, has lost 56% in value in the last year as people returned to work.