This article is based on our Weekly News Digest #42 from 23.10.2023. If you want to receive such analyses first, be sure to subscribe to our weekly newsletter. There, we analyze the largest deals, elaborating on the financials and strategy behind, while also covering the smaller transactions of the week.
Canada-based Esports company GameSquare Holdings (NASDAQ: GAME) is set to acquire US-based gaming and Esports organization FaZe Clan (NASDAQ: FAZE) in an all-stock deal, which values the latter at approximately $18.5m after more than a year of being publicly traded. The price represents a 17% premium over FaZe Holdings’ recent valuation of around $15.8m.
GameSquare Holdings became what it is after a merger of two Esports and digital media companies — GameSquare Esports and Engine Gaming & Media — in Dec’22. After the deal, GameSquare Esports shareholders owned approximately 60% of the combined entity, while the rest went to Engine Gaming & Media shareholders.
To support the deal, GameSquare has secured a commitment from Goff & Jones to acquire $10m worth of stock in the newly combined company. Additionally, the company will take $10m through new shares issue and a loan facility agreement with SLR Digital Finance. These actions will likely bring FaZe Clan out of its challenging financial situation, provide resources to support after the merger period and cover the short-term operational costs of the combined company.
The deal is expected to be closed by the end of the year. GameSquare shareholders will own ~ 55% of the combined company, while current FaZe Clan shareholders will own approximately 45%. FaZe Clan founders Richard “Faze Banks” Bengtson, Thomas “FaZe Temperrr” Oliveira, and Yousef “FaZe Apex” Abdelfattah will once again become the heads of the company.
Let’s put the numbers into perspective. Back in Oct’21, FaZe Clan initially expressed its intention to go public via SPAC and get a valuation of $1B. Apparently, in Apr’22, after the company published its SEC amendment and reported a $36.9m Net Loss with $52.9m Revenue for the year ended 2021, the valuation started to decrease. Moreover, at that moment, FaZe Clan had $110.3m in Total Liabilities, which was $73.2m more than $37.1m in Total Assets. As a result, after going public via the SPAC merger, FaZe Clan got a valuation of $725m.
As we see it now, even the $725m valuation was too exaggerated. At the acquisition, the valuation plummeted 46 times to $15.8m. On October 13, 2023, the last trading day of FaZe Clan before the announcement of the acquisition, the company had a share price of $0.23, which is 86 times less than the peak price of $20.08 per share on August 9, 2022, shortly after the company went public.
Source: Yahoo Finance
Of course, such a tremendous drop in the company’s valuation can be partially explained by the overall market correction we’ve witnessed for some time now. However, the decline of the industry is far less drastic. Looking at the investment climate in the Esports industry, we can see that the number of deals we see each quarter is significantly lower than that of the previous years. In Q3’23 we tracked seven Esports deals, which is 46% lower than in Q3’22 and five times less than in Q3’20.
Esports is not doing very well lately, but this is a part of the overall trend. What is happening with FaZe Clan is more than external circumstances and market fluctuations.
As seen from the company’s reports, the average Revenue from Q4’21 to Q2’23 is ~$15.6m, which keeps dropping. Thus, in Q2’23, the FaZe Clan reported $11.7m in Revenue, representing a 38% YoY decline.
As for the Adjusted EBITDA, it has been remaining negative for a long time now. Its 2022 Financial Report explains this with the high General and Administrative expenses, which include costs in compensation and benefits due to increased headcount, stock compensation expense, and professional services fees due to the growth of the business and becoming a public company, which in turn shows that the decline of FaZe Clan’s business was partly caused by the company going public.
The story of FaZe Clan shows how the right timing can turn your company into a large business. If we look at the market, FaZe Clan was lucky to go public even at $725m, failing to meet the $1B expectations of the leadership at that time. The market was likely still impressed by Savvy Games Group, which, not long before FaZe Clan went public, acquired two Esports organizations, ESL Gaming from Sweden-based MTG ($1.05B) and UK-based FACEIT ($450m) for a combined transaction of $1.5B. If FaZe Clan had taken longer to finalize the deal, we could have seen the valuation drop even further. As we saw above, the Esports hype has cooled, and we no longer see the comparable deal size and valuation.
Now, the company enters a new period, going significantly down in scale and removing the impossible need to restore the company’s initial valuation. Instead, the newly combined company will have to work together not to repeat the disastrous plummet we saw with FaZe Clan.
