Video games such as Runescape have been hot property for investors
Credit: Jagex
In the mythical world of Runescape, wizards battle with runic powers across the wilderness, knights hone their skills slaying monsters and dragons, and barbarians plot raids on cityfolk.
In the real world, a very different sort of barbarian has orchestrated its own capture of a prize asset. Carlyle Group, the $230bn (£167bn) US buyout fund, has swooped for Jagex, the Cambridge video game developer famous for its 20-year-old Runescape series, bringing to an end a difficult era of ownership under a Chinese corporate.
The deal comes amid a flurry of activity in M&A and investment in the UK games sector and a record year globally.
In total in 2020 there was more than $40bn of dealmaking in the gaming sector, around $18bn of which was M&A activity, one of the highest-spending years ever, according to data from The Game Economy.
Gaming stocks, meanwhile, have surged, with UK listed games companies nearly doubling their value last year. Can this run continue and does investor appetite mean there is more M&A to come?
In Runescape, players create characters and level up through quests, battles, trading, crafting and even mundane activities such as fishing.
In Runescape, players can battle monsters or trade and level up with friends
Credit: Jagex
On the surface, the quirky world of Runescape may seem an unusual target for a venerable private equity giant. But under the hood, Jagex has grown to a £111m turnover business with nearly £50m in annual profits, supported by subscription revenues from more than three million players.
With news last week dominated by GameStop, the US video games retailer that saw its share price surge thousands of percentage points, chief executive Phil Mansell says that some Reddit users have joked they honed their trading skills in the virtual marketplaces of Runescape.
“Our games have giant market economies, auction houses and are incredibly social,” he says. “Players have a huge amount of freedom. They can craft, manufacture items, build clans and trade resources.”
Runescape launched in 2001 purely as a “browser” game, the idea being players could log on from any computer. It now has a desktop version and has expanded into mobile gaming.
After several years in various hands, it was sold to Chinese owners in 2016 for $300m. Fukong Interactive, previously a holding company of mining ventures, had hoped to expand Jagex in the Chinese market. But regulatory scrutiny of Fukong, unrelated to Jagex, curtailed expansion hopes.
After securing a sale to a US holding company for $530m, it was then sold to Carlyle. Mansell says he believes the new ownership should provide a long-term partner. “Games as a sector has been maturing and becoming more robust. There is more predictable and recurring revenue. Games have reached a maturity and a level of recognition in terms of finance.
“This has been accelerated through Covid. While markets have been volatile, games have been a place of solace for people to come into when life has been restricted. Especially online and social ones.”
It is not the only big takeover of a UK games studio, coming weeks after a bidding war for Codemasters, the Southam-headquartered developer of racing simulator games including the F1 and Dirt series.
Codemasters develops the Dirt racing series
Credit: Codemasters
US giant EA, which owns the FIFA games franchises, ultimately outbid rival Take-Two, which makes the Grand Theft Auto Series, in a deal valuing London-listed Codemasters at £945m.
UK-listed games companies of around £1bn in market cap have also been active in consolidating small studios to fuel their growth.
“There is activity in both directions on the M&A side,” says Ken Rumph, an analyst at Jefferies.
“Almost every games company we look at has cash,” Rumph says, “and all the guys in the US are looking for deals. If you like, there is a chain of predators. The big ones are eating the smaller ones.”
While UK activity has largely been in the mid-market, there are megadeals in the offing. Time Warner was last year said to be seeking $4bn for its gaming unit. Tech giants are also making plays. The biggest deal was Xbox-maker Microsoft’s $7.5bn acquisition of ZeniMax, the owner of Bethesda, the studio behind successful games franchises Skyrim, Doom and Fallout.
“2020 was a massively busy year. In a way, it surprised people given the dynamic of the rest of the market,” says Olivia Honychurch, an analyst with Liberum. She adds many games studios are likely to continue to be acquisitive into 2021. “Major developers have seen their earnings go up over the last 12 months. We believe there is around an extra $10bn floating around the sector.”
Bethesda, which makes the Fallout series, was snapped up by Microsoft for $7.5bn
Credit: Bethesda
On the UK front, Alasdair Young, of Panmure Gordon, notes that the big listed UK developers do not make easy targets. “I don’t think any of the big ones left are obvious targets,” he says. That said, many are becoming acquirers themselves. Keyword Studios, the Irish firm listed in London, is on the record saying it is hunting for M&A deals, according to boss Andrew Day.
According to Jefferies analysts, other firms such as Team17 (known for the Worms franchise) and Frontier Developments (which makes games on Jurassic Park intellectual property), have large founder shareholdings, making them tricky targets for a hostile takeover.
Obvious hunters in the UK market include the likes of China’s Tencent, which already has stakes in Sheffield’s Sumo Digital and Frontier Developments, and Microsoft, which has acquired several UK studios in recent years.
“Tencent could often be seen as plan B for companies. They are first in the queue,” says Jefferies Rumph. According to analysis from Niko Partners, Tencent did 31 deals alone in the gaming sector last year.
On the other side, there could be new firms coming to market in the coming months. “There are certainly a few looking at it,” says Young.
In some respects, the Jagex acquisition by Carlyle is unusual. There are no other UK studios owned by giant Wall Street funds.
Buyout funds often come with the reputation for squeezing companies for profits, but Jagex’s Mansell says the deal could see them accelerate their business plans, in particular its third-party publishing arm. It is also working on two new Runescape-inspired games and is planning on finalising its new mobile game in 2021.
He says: “We have this unique combination. The bedrock of the company has been going for 20 years. We have growing profits and player numbers, subscription revenue which is very resilient.”
One benefit to owning a company such as Runescape is regular recurring cash income, thanks to a wide hobby base of players who have stuck with the game for years. Mansell himself admits he owns several “maxed out” Runescape accounts, and is probably “in the top quartile” of players at the company. Although, he adds: “I confess this year has been quite busy.”
The hope for Mansell is that its new ownership can “sponsor us to go to the next level”. He says: “It was important for us and Carlyle that we saw the world in the same way. We are not a turnaround story, we are ‘attaching rocket boosters’. We intend to extend our operating footprint. We intend to do deals in new markets. We want to do M&A of our own.”
While UK gaming companies might remain targets for interested overseas buyers, it seems like several could be on a quest of global expansion in their own right before long.
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