This article is based on our Weekly News Digest #17 from 29.04.2024. 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 giant Embracer Group (STO: EMBRAC B) has announced its intention to dissolve into three separate publicly listed entities — Asmodee Group, Coffee Stain & Friends, and Middle-earth Enterprises & Friends.
The division process is set to conclude within 12 months for Asmodee and by the end of 2025 for Coffee Stain & Friends. The two new entities will be listed on Nasdaq Stockholm, while the remaining divisions of Embracer Group will be rebranded as Middle-earth Enterprises and Friends. This reorganization aims to optimize the capital structure and enhance the long-term growth potential for each division.
Lars Wingefors, the primary shareholder, intends to retain a significant ownership position and extend support to all three entities. The transformation plan has received substantial backing from shareholders, representing over 50% of capital and votes in Embracer Group.
There has been a lot of news surrounding Embracer Group lately, so here’s a brief overview of recent developments:
— From 2020 to 2022, Embracer Group was the most active acquirer in the gaming industry: over 65 acquisitions for a total disclosed value of over $8.9B. Its aggressive M&A strategy led to the company growing twelve huge operating groups managing hundreds of projects simultaneously. You can read more about this stage of the company in our piece for Naavik. Back then, we expressed our concerns about the company’s future and predicted the inevitable need for selling some of the acquired business to optimize the structure of the holding;
— In Jun’22, Embracer raised $1B from Saudi Arabia-based Savvy Games Group, a subsidiary of Saudi Arabia Public Investment Fund;
— In 2023, the same investor, Savvy Games Group, was rumored to be about to invest another $2B into Embracer. However, the deal fell through, causing a rapid fall of the Embracer’s stock and marking the start of the company’s crisis;
—In Jun’23, the company announced a restructuring program, intending to cope with an internal crisis by mainly cutting costs and raised ~$183m a month later to support the process;
— In Mar’24, Embracer sold Saber Interactive and Gearbox Entertainment, two of its largest PC & Console divisions.
Multiple factors drove the sale of Saber Interactive and Gearbox Entertainment, which we analyzed in our previous digests. In short, beyond merely reducing costs and divesting large units, the move aimed to save these subsidiaries and provide them with fresh opportunities for growth. Therefore, what appeared to be the restructuring was only the preparation for a more significant move: a division of the holding into three public companies.
Source: Embracer Group
Examining these entities will provide clearer insights into the strategic rationale behind this decision.
Asmodee Group: Board Games Company With The Largest Net Sales in the Group
Asmodee is a France-based tabletop games publisher with 23 subsidiary studios and over 300 IPs onboard. Among the company’s best-known games are Ticket to Ride, 7 Wonders, Azul, and Catan. In addition, Asmodee creates board games based on licensed franchises like The Lord of the Rings, Marvel, Game of Thrones, and Star Wars. Collaboration with IPs like Middle-earth will continue post-spinoff.
In 2023, the company reported Net sales of ~$1.36B (SEK 14.8B) — the best result among the three companies Embracer is splitting into. Another sign of Asmodee’s success is the interest it got from the investors. This is the only division raising money among the spin-off: the new loan agreement with 18 months maturity will provide the company with $963.7m (€900m) from several banks: JP Morgan, BNP Paribas, SEB Group, Societe Generale, and Swedbank. In preparation for Asmodee’s spinoff, Embracer will also renegotiate the earnout structure with Asmodee’s management.
In short, the deal aims to improve the company’s margins and cash flow and accelerate its further growth via M&As, but we will discuss the rationale behind the spinoff after this analysis.
Coffee Stain & Friends: Mobile, Indie, and AA Division
Headquartered in Sweden, Coffee Stain & Friends will have over 200 IPs under its wing and will focus its work on two main segments:
— Premium operations primarily focus on PC & Console Indie and AA projects. It includes companies like Coffee Stain, Ghost Ship, Tarsier, Tuxedo Labs, THQ Nordic, Amplifier Game Invest, and franchises like Deep Rock Galactic, Goat Simulator, and Valheim.
— Free-to-play operations with a mobile focus. Companies working on this segment include Easybrain, Deca, CrazyLabs, and Cryptic.
In 2023, the company reported Net sales of ~$1B (SEK 10.9B), and Adj. EBITDA of ~$385m (SEK 4.2B). It is the smallest company regarding Net Sales, but the best regarding Adj. EBITDA, and 25% margin.
Middle-earth Enterprises & Friends: AAA Powerhouse
Based in the US, Middle-earth Enterprises & Friends will accumulate the remaining AAA studios in projects from Embracer Group.
The new entity will consist of such studios as Crystal Dynamics, Dambuster Studios, Eidos-Montréal, Flying Wild Hog Studios, Tripwire, Vertigo Games, Warhorse Studios and 4A Games, PLAION, Freemode, and Dark Horse. In 2023, this group of companies reported Net sales of ~$1.3B (SEK 14.1B), and Adj. EBITDA of ~$375.8m (SEK 4.1B).
The company will own rights for such franchises as Lord of the Rings, Tomb Raider, Dead Island, Killing Floor, Kingdom Come Deliverance, Metro 2033, and others.
The Strategy Behind the Split or How to Get Rid of Negative Synergy
The main goal behind the deal is close to the rationale behind the sale of Saber and Gearbox: to optimize operations and eliminate interdependencies among the companies.
Source: Yahoo Finance. Currency: SEK
Embracer Group’s Board of Directors highlights the following strategic points:
— The scale and operational clarity of each entity will be enough to attract a broader investor base;
— The independence will enable each company to utilize its balance sheets, financial and strategic targets to accelerate growth;
— The streamlined approaches will allow the companies to focus on certain operations;
— The entities will continue collaborating on market terms for IPs, companies, and talent.
The best illustration of independence’s opportunities is the substantial $963.7m raised by Asmodee. It’s hard to imagine Embracer Group securing such a loan amidst its restructuring. By separating from Embracer, however, Asmodee is better positioned to attract investors and partners keen to support its core mission of board game production.
The same applies to Coffee Stain & Friends and Middle-earth Enterprises & Friends. Each of the new companies will have a much more focused market strategy. Separating from the huge holding leads to more significant responsibilities, so specific short-term changes in each company might also be expected.
Overall, the deal concludes the result of Embracer’s unprecedented M&A activity. Embracer’s original strategy could not sustain, primarily due to the unwieldy structure of the business, the complexities of managing and expanding all its divisions within the group, and overall shifting market dynamics. However, the recent strategy to split the companies into autonomous entities with distinct goals presents a promising evolution for Embracer as a holding company. Observing how these individual businesses evolve and whether this leads to new M&A deals will be interesting.
