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UPDATE: Sumo Group Has Finished The Acquisition Of Pipeworks Studio

M&A | ANNOUNCEMENT DATE: OCTOBER 16, 2020
WRITTEN BY | 20 Oct 2020
UPDATE: Sumo Group Has Finished The Acquisition Of Pipeworks Studio
M&A
💵 Acquisition
  • UK-based multiplatform video game developer Sumo Group has completed the acquisition of Lake Street Labs Buyer Corp, the owner of Oregon-based console game developer Pipeworks Studio for a total consideration price of up to $99.5m

    • The deal is comprised of several stages:

      • The upfront consideration of $59.5m, which consisted of $35m cash payment and $24.5m Sumo Group’s common shares. The share portion of the Upfront Consideration is subject to a 12-month hard lock-up and 12-month orderly market arrangement.

      • The first tranche of the additional Earnout Consideration in form of $8m based on the EBITDA results by December 31, 2020

      • The second tranche of the additional Earnout Consideration in form of $32m based on the EBITDA results by December 31, 2021, with additional conditions relating to the visibility of contracted revenue in the subsequent year ended 31 December 2022

    • The total Earnout Consideration of $40m (split into a 50% fixed amount and a 50% variable amount) will be paid partly in cash (30% to 70% subject to the Sumo Group decision), with the rest to be paid in Sumo Group common shares. The share portion of the Earnout Consideration is subject to a six-month hard lock-up and 12-month orderly market arrangement

    • Disclosed deal closing conditions included the separation of game-based project creation company MetaTeq, which continues to be owned by Northern Pacific Group, and the allotment and admission to trading on AIM of the Sumo Group consideration shares

    • Only 23.7% of Lake Street Labs share capital were owned by Pipeworks and MetaTeq management teams and employees, with the remaining 76.3% being indirectly owned by institutional investors, led by private equity firm Northern Pacific Group

    • In February 2018, Northern Pacific Group and other investors have backed the management team at Pipeworks to perform a carve-out from the Italian game developer and publisher Digital Bros (that acquired Pipewords Studio from Backbone Entertainment in 2014)

    • The initial announcement about the deal came earlier this month, on October 4

Multiplies w/o Earn-out with Earn-out
EV/Rev’20 3.1x 5.1x
EV/Adj. EBITDA’20 14.2x 23.7x

Based on Pipework’s financial results for 12 months ended June 30, 2020

🧩 Strategic Rationale

  • Sumo Group and Pipeworks have a history together, both once being owned by Foundation 9 Entertainment, with the CEO of Pipeworks, Lindsay Gupton, and CEO and COO respectively of Sumo Group, Carl Cavers and Paul Porter, knowing each other pretty well and being committed to staying in business

  • Pipeworks has a strong US-based client list, with the likes of Electronic Arts, Wizards of the Coast, Google, Genvid, and Age of Learning, further expanding and strengthening Sumo Groups net of business relationships

  • The deal should greatly enhance the Sumo Group’s earning figures by the end of December 2021, after the first full year of Pipeworks ownership

  • The acquisition also expands the Group’s individual talents, with the studio’s headcount of 134 employees (excluding over 50 contractors), increasing the total amount of Sumo Group’s employees to about 1000 people – a 16% increase in workforce

  • Pipeworks own the proprietary created live-game backend technology COSOMO™ technology, which has powered many games and simulations since 2011, together with its development/operations expertise

🎲 Products

  • Pipeworks is a video game development studio with over 300 million players, that provides full development, co-development, and live operations services to major gaming publishers

  • The company also co-operates with partners from adjacent markets to provide game technology-powered solutions and applications in areas like AI, Simulation, Machine Learning, Extended Reality and Cloud Streaming for such spheres as education, healthcare, retail, location-based entertainment, and the US public

  • Pipeworks has worked on over 100 game titles and Interactive Tech Solutions and co-operated with over 50 clients and partners on multiple platforms

  • MetaTeq, which is owned by Pipeworks, was focused on the development of serious games using the company’s advanced tech and knowledge in the sector, however, MetaTeq was spun out before the closure of the acquisition as part of its closing conditions

📈 Financial Performance Of Pipeworks

  • Sumo Group expects Pipeworks to contribute approximately $0.8m to Sumo Group’s EBITDA in the year ending 31 December 2020, assuming the acquisition to be completed by the end of October 2020

  • Sumo Group expected to have net debt close to zero by the end of the acquisition, with $23m of the upfront consideration to be used to settle debt like items in Lake Street Labs or Pipeworks

  • Pipeworks saw a noticeable financial increase in H1’20, with its revenue growing 23.7%, gross profit – 35.1%, and adjusted EBITDA – 42.9% since the end of 2019

  • The revenue from contracted games represents 95.1% of Pipework’s forecast revenue by the end of December 2020, with the game’s revenue representing 80% of the studio’s total revenue

$MUSD Revenue Gross Profit adj. EBITDA EBITDA margin
Jan’19-Dec’19 14.8 4.8 2.4 16%
Jul’19-Jun’20 19.4 7.4 4.2 22%

💸 Sumo’s M&A Activity

  • In May 2020, Sumo Group has acquired a cross-platform work for hire studio Lab42 for 600k

  • In January 2019, the company acquired Red Kite Games – a work-for-hire studio with a focus on engineering and code support services – for a total consideration price of $2.6m

  • In August 2018, Sumo Group has acquired PC and console game developer The Chinese Room for consideration of roughly $2.86m

  • In January 2018, Sumo acquired the VR-focused studio of CCP Games based in Newcastle for an undisclosed fee

  • In June 2017, Sumo Group has acquired digital art and design studio Atomhawk for an undisclosed sum

  • Additionally, in November 2019, Chinese gaming giant Tencent has acquired a 9.96% share in Sumo Group from the company’s existing investor Perwyn

 

SOURCES: PRNEWSWIRE

Sumo Stock.png
Sumo Group
  • Established in 2003

  • Went public on AIM market of the London Stock Exchange in December 2017

  • Headquarters – Sheffield, United Kingdom

  • Team of 853 employees (as of August 2020)

  • Founded by –  Carl Cavers, Paul Porter, Darren Mills and James North-Hearn

  • Multiplatform video game developer

  • Latest interim report

Pipeworks
  • Established in 1999

  • Headquarters –Eugene, Oregon, United States

  • Team of 134 employees

  • Founded by Dan White and Dan Duncalf

  • Console game developer

  • Deal presentation