One of the highlights of Ubisoft Entertainment SA’s Assassin’s Creed game series is the “leap of faith,” when the hooded main character takes a stomach-churning dive from the rooftops and always lands safely in a conveniently placed hay bale. That appears to be what Ubisoft’s long-suffering shareholders are being promised as the Guillemot founding family and Tencent Holdings Ltd. consider options including a potential buyout, after an 80% share-price meltdown in five years. But a safe exit is far from assured.
It’s clear that something heroic is needed from the Guillemots, who began a partnership with Tencent in 2018 as a way to consolidate their grip and fend off predators like Vivendi SA. A lot has gone wrong since, with Ubisoft’s enterprise value relative to underlying earnings dropping to the lowest among peers after a recent profit warning. Several game cancellations, flops and the disappointment of Star Wars — Outlaws show the firm struggling to keep up in a market where game development is prohibitively expensive and the fight for customer attention is getting tougher — after all, gamification is everywhere from Netflix Inc. to Duolingo Inc. The decision to delay the next instalment of Assassin’s Creed to 2025 shows panic seeping into its most bankable property, which featured heavily at the Paris Olympics alongside other soft-power icons such as LVMH SE.
A takeover or take-private would, in theory, allow Ubisoft the time and space needed to squeeze more money out of its classic franchises and cut costs; on a per-employee basis, it makes a fraction of the revenue of Nintendo Co. or Grand Theft Auto maker Take-Two Interactive Software Inc. But Tencent is no ordinary bidder in an increasingly protectionist world less willing to wave through cross-border deals, as Bloomberg Intelligence’s Nathan Naidu notes. As the below chart shows, trying to sell a French company to a Chinese bidder has been a losing game over the past decade, hitting rock bottom after 2022. Tencent rival NetEase Inc. did manage to buy French video game studio Quantic Dream that year, but at a fraction of the value of a Ubisoft takeover and with less visibility. As Europe tries to narrow a tech gap with the US and China, Ubisoft may be viewed as a strategic player.
Another hurdle for shareholders being asked to place their faith in a potential takeover is price: What is this business really worth when so many headwinds seem to be structural as well as cyclical? The current market capitalization of €1.8 billion ($1.98 billion) seems to seriously undervalue Ubisoft’s stable of brands: Taken together, Assassin’s Creed, Rainbow Six, The Division and Far Cry could be worth more than €2.5 billion, according to analysts at Barclays Plc. But there’s a fair chunk of debt too, taking the firm’s current enterprise value to €3.1 billion.
Hopes for a bidding war may run into the reality of a games market that is stagnating and a track record of poor management at Ubisoft, from costly delays and workplace issues to ill-advised NFT experiments. Ubisoft’s concentrated shareholder structure may also be an obstacle: The Guillemot family held about 20.5% of net voting rights at the end of April, with Tencent controlling 9.2%.
As takeover speculation builds, the risk is that the Guillemots fail to close the credibility gap after years of value destruction. The message in their latest statement is that their focus is firmly on delivering open-world adventures and “games-as-a-service.” But considering recent performance, that doesn’t leave much room for error, and only racks up pressure to cut costs. Assassin’s Creed Shadows faces a tough new release date next year with another samurai game out due around the same time; Ubisoft’s live-service game XDefiant could itself struggle to survive as a new Call of Duty game approaches, according to JPMorgan Chase & Co. analysts.
Of course, it’s not all doom and gloom. There’s upside for Ubisoft if it manages to restructure in a changing industry that’s targeting the top 1% of players with more premium products, reckons NYU Stern School of Business professor Joost van Dreunen. “When properly managed, intellectual property can last generations,” he says. We’ve seen turnarounds in gaming before, like CD Projekt SA’s Cyberpunk 2077.
But investor frustrations haven’t disappeared, and execution risk is high. In the real world, a leap of faith doesn’t always hit the hay bale.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes.
Source: Mint