This article is based on our Weekly News Digest #11 from 18.03.2024. If you want to receive such analyses first, subscribe to our weekly newsletter. There, we analyze the most significant deals, elaborating on the financials and strategy behind them, while also covering the smaller transactions of the week.
Sweden-based gaming holding Embracer Group (STO: EMBRAC B) has sold PC & console games developer Saber Interactive, for $247m to Beacon Interactive, a company owned by Saber’s original co-founder Matthew Karch.
Transaction Key Details:
The transaction allows Embracer to cease all of its operations in Russia — a strategic move announced along with the sale. The consideration for the transaction is $247m, comprising of:
— $203m paid with promissory notes to be repaid in cash by the end of 2024;
— $44m of absorbed earn-out debt obligations set during Saber’s acquisition by Embracer.
If Beacon Interactive resells some of the acquired assets for a higher price during the undisclosed time frame, Embracer might get an additional payment of up to $94m.
Beacon Interactive will also take all the earn-out obligations before Saber and guarantee their payment if the targeted goals from the original deal are met.
Prior to the analysis, a brief overview of the acquired assets and terms is required. Four years as Embracer’s operative group turned Saber Interactive into a large business with over 20 subsidiaries, but not all of them will separate from Embracer as a result of the transaction. Beacon Interactive will acquire the following subsidiaries along with Saber: Nimble Giant, New World Interactive, 3D Realms, Sandbox Strategies, Mad Head Games, Slipgate, Fractured Byte, Digic — all these studios were acquired during the period from Nov’20 to Dec’21. Overall, Beacon Interactive will acquire 38 ongoing gaming projects and additional proprietary gaming engines and tools related to the divested studios.
Post-transaction, Embracer will retain control under the following studios previously being operated by Saber: Aspyr, Beamdog, Tripwire, Tuxedo Labs, 4A Games, 34 Big Things, Demiurge, Zen Studios, Snapshot, and Shiver. Retained gaming projects include 4 AAA titles, 2 AA titles, Killing Floor 3, and Teardown, as well as the back catalog from Zen Studios, Aspyr, and Tripwire, for a total book value of ~$48.1m.
As a part of the deal, Beacon signed an option, allowing the company to purchase 4A Games and Zen Studios within a set time for a fixed undisclosed price, which will be higher than their current book value of $81m. The deal’s full details are private, but if the Beacon goes ahead, it will also be liable to sign $31m of extra earn-out consideration. The rights to the Metro game series, however, will still stay with Embracer.
Embracer: A Big Step For Optimisation
The sale is a strategic step towards Embracer’s larger goal of optimizing its operations as a part of the restructuring process launched in Jun’23. The specific reasons for the restructuring have been discussed in one of our previous digests.
As a result of this transaction, Embracer’s Capex will be reduced by $115m (SEK 1.2B), which represents a significant step towards the company’s targeted reduction of $278m (SEK 2.9B). With this transaction alone, Embracer has achieved 41% of its Capex reduction goal. Another strong expense cut would be made with 21% (2950 employees) of Embracer’s headcount separating after the acquisition.
More financial details on the optimization can be found in the table above. One of the key achievements is the reduction of the holding’s debt by $201m after passing earn-out liabilities and getting proceeds from the transaction.
Reducing the complexity of such a huge holding requires big moves and significant cuts, even if they imply a great decline in the assets evaluation. Back in 2020, Embracer set a $525m Saber valuation with the acquisition. However, only a $150m part was paid as an initial consideration, with $375m being set as a potential earn-out to be paid in the following 6 years, provided that agreed milestones are fulfilled. Considering the period of the earn-outs, not all of them were paid and some might be paid to Saber’s management later by Beacon Interactive, as mentioned earlier.
Nevertheless, the $247m valuation is still much lower than the company saw 4 years ago. Especially considering all the additional studios that were put under the wing of Saber during Embracer’s M&A activity and are now leaving the holding together with Saber. Such growth allowed Saber to expand its staff from 600 employees in 2020 to a team of over 2950, which are being divested from Embracer now.
Most importantly, by selling Saber Interactive, a key developer of PC & console games known for its AAA projects, Embracer Group has made a pivotal shift in its business focus. This move, coupled with rumors around the potential sale of Gearbox, signals a transition from the AAA segment towards AA and indie.
Saber: Challenges and Opportunities of Independence
In many senses, the deal is about the preservation of Saber’s legacy, including IPs, portfolio, teams, and projects that are currently under development. The company gets back to its co-founder, who left Embracer to make the deal possible. This opens a lot of prospects for the once again independent company, be it attracting new investors or even selling the company to someone else. Now, there is no investors’ pressure Embracer inevitably faces being a public company, which gives more freedom in the decision-making.
Freedom, on the other hand, might come with greater risks. Now the company needs to sustain itself and work independently. Most importantly, if the company intends to execute the options for 4A Games and Zen Studios, it might either perform especially well or initiate fundraising as soon as possible. If everything goes well, more stability under new ownership will allow more investments in the company’s growth, development, and continuation of its projects without the constraints Embracer’s current financial or strategic priorities might impose.
Considering all of that, the deal represents how both companies are ready to adapt to keep their businesses afloat. It shows that sometimes the industry is not about huge valuations and rapid growth. It’s about making hard decisions for the sake of keeping something bigger and moving through the hard times.
