This article is based on our Weekly News Digest #9 from 04.03.2024. 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 conglomerate Embracer Group (STO: EMBRAC B) is reportedly selling its subsidiary, US-incorporated PC & Console games developer Saber Interactive, for $500m. Among the potential buyers might be a group of private investors. To understand why the deal happens, let’s look at the story behind Saber acquisition and the Embracer Group’s significant changes in their long-term strategy.
Part One: Rapid Growth and Numerous M&As
Before being acquired by Embracer in 2020, Saber primarily developed FPS games using its game engine Saber3D. Founded in 2001, the studio was known for shooters like World War Z, Will Rock, TimeShift, remakes of 2 installments in the Halo franchise, Quake Champions, and several other games for different publishers.
Back to the acquisition, it valued the company at $525m. 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, it’s almost certain that not all of the $525m were paid yet.
The most important thing for this analysis is that Saber became the 5th operative group of Embracer, thus being one of the company’s first massive deals and one of the main pillars of future growth. Today, the holding consists of 12 main branches, called operative groups, each owning 10–30 internal studios. Each operative group serves as a platform for acquisitions, and Saber is no exception. Throughout those years under Embracer, Saber Interactive welcomed over 20 companies under its wing — just the disclosed combined sum of the acquisitions of Saber and its internal studios amounts to more than $1B; the most significant deals were a $450m acquisition of porting powerhouse Aspyr and a $45m purchase of 4A Games, known for the Metro 2033 games series.
Such growth allowed Saber to expand its staff from 600 employees in 2020 to a team of over 3,000 members in 2023. Since then, the company has significantly broadened its portfolio with titles such as SnowRunner and Evil Dead: The Game. Moreover, Saber is the studio behind the highly anticipated sequel to Warhammer 40,000: Space Marine, scheduled for release in H2’24. Meanwhile, the newest installment in the MudRunner/SnowRunner franchise, Expeditions: A MudRunner Game, is just around the corner. Considering the support of the previous titles and the popularity of the franchises, Expeditions and Warhammer 40,000: Space Marine are among the most crucial titles in the pipeline for upcoming years.
Apart from that, Saber, via its subsidiaries, owns several other notable gaming franchises like Metro, a series of Star Wars games ports, and Redout, as well as outsourced projects, including Halo: The Master Chief Collection, Marvel Snap, Hearthstone, and a Nintendo Switch port of The Witcher 3: Wild Hunt, to mention a few. Today, one of the most anticipated releases from the company is the upcoming remake of Star Wars: KOTOR.
Unfortunately, we already know what’s going to happen next.
Part Two: The Restructuring
In Jun’23, Embracer announced its restructuring, setting a goal to reduce its capital expenditure by at least $270m (SEK 2.9B) by FY24/25. Before examining how it influenced Saber Interactive, let’s look at the significant reasons behind the crisis.
In Jun’22, Embracer Group raised $1B from Saudi Arabia’s Savvy Games Group, with the latter acquiring an 8.1% stake in the company. The deal drew mixed reactions from the investors, making Embracer CEO Lars Wingeforce publish an official comment on the deal, defending the company’s strategy. Then, In May’23, the holding announced a collapse of a $2B deal with an undisclosed “major strategic partner” that is rumored to be the same Savvy Games Group. Whether the rumors are true or not, the news triggered the plummet of Embracer’s shares, and the bubble burst. But the reason behind this dramatic situation is far beyond the deal. It concerns the growth of competition, the lack of successful releases, and the struggles of operating such a vast and diverse holding. You may read more about all of these in our analysis.
Source: Embracer Group
The restructuring eventually led to the cancellation of many projects and massive layoffs — the number of Embracer’s employees dropped from 16,200 to 15,200 in one year, and around 30 games were canceled. This, of course, affected Saber Interactive. In Dec’23, an undisclosed number of employees from New World Interactive, one of Saber’s internal studios known for Insurgency: Sandstorm, were laid off. Plus, the studio has stopped the support of Evil Dead: The Game and ceased the plans for Nintendo Switch porting. This, however, is likely related to modest sales, decreasing popularity of the title, and a tough niche dominated by a single Dead by Daylight game.
Saber is among the subsidiaries least affected by the restructuring. Take Eidos Montreal, where Embracer laid off 97 employees and canceled the next Deus Ex game or Black Forest Games, which reportedly cut 50% of its employees. Worse scenarios are possible, and the potential sale is one of the ways to negate them.
Part Three: The Beneficial Break-Up?
Let’s look at the most noticeable part of the potential deal: valuation. The company is being sold with a 5% discount compared to its total valuation including earn-outs at the initial acquisition. Since then, the company has grown by over 20 subsidiaries and over 3000 employees.
But still, going separate ways might be beneficial for both structures. Proceeds from the deal will help cover Embracer’s current operational expenses and potential earn-out payments of previously closed deals. At the same time, the sale of Saber Interactive will significantly cut the costs of the holding. All this may support the restructuring process and bring Embracer closer to the targeted financial KPIs. Some of the rumors suggest that we might hear the news about other sales.
On the other hand, being sold to private investors, Saber Interactive can avoid potential project cancellations and layoffs, initiate the fundraising process, and secure a new round to support scaling. In this scenario, the company will also become free of obligations to public investors and be less dependent on the market dynamics. More stability under new ownership will allow more investments in its growth, development, and the continuation of its projects without the constraints Embracer’s current financial or strategic priorities might impose.
Whether this particular deal happens or not, we are still likely to hear the news about both Embracer and Saber since the restructuring process still influences the fate of both structures.
