Frontier Developments PLC (AIM:FDEV) has completed its first acquisition and City analysts have been effusive in their praise of the deal.
The computer games group snapped up Canada-based Complex Games for up to C$18.2mln (£11.6mln) in its debut deal since being set up by David Braben almost three decades ago.
Complex has been working with Frontier through the Foundry third-party programme, through which it designed 'Warhammer 40,000: Chaos Gate – Daemonhunters', a turn-based strategy game that was released on the label this summer and became the most successful Foundry game to date.
An initial £8.3mln will be paid to buy 100% of Complex, which employs 20 staff, primarily developers. A further cash consideration of £3.3mln depends on meeting operational milestones in the 2023 calendar year, with a further profit-share earn-out of £7.5m payable over five years, funded from future cash profits generated from games developed by the Winnipeg studio.
Frontier's cash balances as of 31 August 2022 were £53.1mln.
Jefferies analyst Sebastian Patulea said: “We like Frontier's 'try it before you buy it' approach. The acquisition today is a low-risk way for Frontier to capitalise on the success of one of its partners at a sensible multiple.”
He estimated the transaction was agreed for 10 times next year's forecast underlying earnings (EBITDA), which compares favourably with Frontier's 11 times multiple.
Lead humanity’s greatest weapon, the Grey Knights and root out a galaxy-spanning plague in a cinematic, story-driven campaign! Warhammer 40,000: Chaos Gate - Daemonhunters is OUT NOW! https://t.co/Vhwm30qywu pic.twitter.com/k8ZqHvppwM
— Warhammer 40,000: Chaos Gate – Daemonhunters (@ChaosGate) May 5, 2022
Peel Hunt analyst James Lockyer said: “We believe this is a great acquisition and is in line with its previous stated policy of how it will be looking for M&A: in this instance by looking at its Foundry partners in terms of success, culture, and future potential. By adding this one in particular, Frontier now holds both of its Warhammer games in-house.”
He said the intention to grow the Winnipeg team “will add to Frontier's game portfolio over the medium-to-longer term".
"Given its recent close collaboration, there will be an element of de-risking of the acquisition. The total maximum upfront and deferred contingent consideration of up to C$18.2mln/£11.6mln will come from existing cash resources. The acquisition is expected to deliver modest accretive financial benefits in FY23/FY24," the analysts added.
Given that Frontier will now keep 100% of the profits from the Warhammer 40,000 game, Katie Cousins at Shore Capital said she plans to increase 2023 and 2024 adjusted EBTIDA forecasts by circa £0.5mln, to around £25mln and £31mln respectively, noting increased gross R&D is likely to be capitalised in line with the group’s policy.
“We believe this morning’s deal is strategic and will be helpful to the group in gaining access to talent and resources, and we also welcome the increased control and also reward potential that could come from existing and future projects," Cousins said.
She pointed out that Frontier had endured a difficult period over the last year and noted her continued caution around some of the performance of the existing title within the difficult current consumer environment.