Chinese Internet company Tencent confirmed yesterday that it has agreed to buy SuperCell in a deal that values the Finnish games company at around $10.2 billion. Tencent will acquire an 84.3% stake in the company at a value of $8.6 billion. Supercell employees will continue to own the rest of the company. SoftBank will be selling its 72.2% stake in Supercell and will own no shares after the deal closes in the third quarter.
In addition to selling its stake in the company, SoftBank will also receive a dividend of $0.4 billion from Supercell before the transaction closes. SoftBank say that they have earned a total return of $8.4 billion on their investment in Supercell which is around 2.9 times the original capital invested. SoftBank will receive 48% of the payment from Supercell in August, 50% in November and 2% in August 2019. This isn’t the only big move that SoftBank have made, recently they chose to sell $7.9 billion worth of its shares in Alibaba and around $685 million of its shares in Gungho Online Entertainment. SoftBank say that this is part of their ongoing strategy to cut debt in order to improve their financial standing after a somewhat disastrous Sprint acquisition which has led to an overall debt of $107 billion. SoftBank have shown that they continue to stand by Sprint, by increasing ownership in the company, and therefore are divesting some of their other assets in order to improve on their current situation.
Supercell is a mobile game developer founded in 2010 and based in Finland with 5 offices around the world and 4 hit game titles – Clash of Clans, Clash Royale, Hay Day & Boom Beach which have a combined 100 million+ active users. After switching to a “Mobile First” strategy in 2011, Supercell have been hugely successful with their mainstay title “Clash of Clans”, which has consistently been in the worldwide top 10 grossing iPhone & Android list since launch. Revenues for the company have grown from $101 million in 2012 to over $2.3 billion in 2015. SuperCell also generated a profit of $964 million before tax during 2015 which shows how efficient the company is. What’s even more impressive is that the company achieved those revenues in 2015 with just 3 active games and 180 employees. Whilst Clash of Clans is by far the biggest revenue generator, the average revenue being generated per game in 2015 was around $760 million which is more than most games earn in their lifetime. The revenue per employee metric also shows just how successful the company is with each employee accounting for nearly $13 million in revenue.
As you can see from the chart above, Supercell are generating huge profits that are similar to that of Activision Blizzard & EA and more than that of Sony’s Game division & Nintendo. They were one of the top 10 biggest companies by game revenue in 2015 and one of the most, if not the most, valuable mobile game developers today. The company operates a small number of hit games around a live service model which keeps players engaged and spending over a long period of time. The strategy has worked well for Supercell with all of their games ranking within the top 20 grossing games in the U.S. on a regular basis. Supercell are also not afraid to kill games that they believe have no potential to succeed and quickly move on to another project. Under SoftBank, Supercell have retained their independence which has allowed them to develop the games they want with no restrictions.
Tencent is the largest gaming company in the world, and that’s even before you figure in Supercell’s revenues. Unknown by many in the West, Tencent are a huge Internet company in China who are known for their services such as WeChat and their huge gaming presence on PC & Mobile. Tencent’s strategy for gaming has 3 points. The first point is their investment in internal IP’s aimed at the Chinese market on PC & Mobile. Tencent have developed many hit games in house with the biggest being League of Legends (Riot Games actually developed this but since Tencent own Riot I thought I’d include this as it’s probably the only one you’ve heard of) and other hit titles such as Moonlight Blade, WeMOBA & Honor of Kings. The second point is that Tencent work with external developers to bring their games to China successfully. Many of Tencents biggest games like Crossfire, Dungeon Fighter Online, Blade & Soul and many others are created by overseas developers and then successfully promoted & sold in China. The third point is that Tencent continue to invest in game related companies, Supercell being the most recent example, but before that they purchased Riot Games (League of Legends) and own stakes in Epic Games, Activision Blizzard, Glu Mobile and many others. This allows them to have a huge global presence which often goes unnoticed.
Tencent’s gaming revenues continue to grow at a record pace as they continually release more and more hit games in the PC & Mobile space in China. Online Gaming continues to account for more than 55% of Tencent’s overall revenues and in 2015 the company generated more than $8.7 billion from games software, of which $3.2 billion was from Mobile games. Tencent have also grown their games division by leveraging their Internet services such as WeChat, which has nearly 800 million monthly active users. Tencent also plan to organically grow their games division this year through the release of more hit titles and plan to expand their IP’s into fully fledged entertainment properties through other forms of entertainment.
Benefits for Supercell
There are plenty of benefits for Supercell in this deal, the first being that Tencent are taking a hands off approach and allowing the company to remain independent. In other words there are no changes being made to Supercell’s location, employees, games or creative process etc. and that is a very good thing. It means that Supercell can get on with their winning formula without any issues and can do what they do best. Tencent did the same with Riot Games who have grown League of Legends into the biggest PC game worldwide. Where Tencent can benefit Supercell (& Riot) is with the support and resources to localise their games in Asia and have them promoted in the right way. Tencent can easily provide additional resources to Supercell at any time and assist them in making their games even more popular in China than they are today by leveraging their Android gaming platform which is currently used by more than 300 million unique gamers. Supercell games now have the opportunity to reach more gamers and to enhance their games for social play on Tencent’s gaming platforms. With Tencent publishing the game, rather than Kunlun, it means that the company will see all the revenue that it generates from games sales in China, rather than a small percentage like before.
Another benefit, and one that Ilkka Paananen talked about is being able to work with other Tencent owned companies like riot games to learn from them. Riot games have been hugely successful with e-Sports and Supercell are only just starting to explore the world of e-sports with Clash of Clans. Supercell could potentially work with, or learn from Riot Games in order to enhance the success of e-sports in their titles as an example. Overall, Supercell are in a much better position now than they were with SoftBank. SoftBank were hands off as well but they were too hands off in a way that meant that Supercell couldn’t rely on them for help. With Tencent, Supercell can gain a lot more due to Tencent’s experience in the Games industry. Supercell employees will also benefit from this through a share incentive. Employees will now be able to sell shares from vested options to Tencent on an annual basis which should help employees stay financially motivated. Most importantly of all, Supercell stay private and there are no changes to the magic formula.
Benefits for Tencent
The deal also benefits Tencent in a number of ways as well. The most obvious benefit being that it instantly adds another $2 billion plus in revenues to their online gaming segment. Even if revenue from Tencent games remains flat this year, the boost from Supercell would allow for revenues to increase at a faster rate from 2015 to 2016 than they did from 2014 to 2015. As noted in the slide below, total combined revenues for Supercell and Tencent would’ve equaled $11.1 billion in 2015 and could exceed $13 billion this year giving them a 13% share of all worldwide game software related revenues. The deal will also allow Tencent’s mobile gaming revenues to grow faster than expected and account for around 50% of their total game related revenues. Tencent would now not only be the largest PC game publisher (League of Legends) but also be the number 1 mobile publisher worldwide with Clash of Clans, their internal IP and other partner IP.
Tencent generated around $1.3 billion in revenue during 2015 from outside China. This deal is a way for Tencent to indirectly expand their presence in the West where they’ve traditionally struggled with their own internal IP. With Riot Games and Supercell, Tencent now own one of the biggest PC gaming companies in the West and one of the biggest Mobile gaming companies in the West. Revenues generated in the West could triple as soon as this year for Tencent. The company now has a serious presence and revenue stream outside of China. But this isn’t just about the West. Tencent have done an excellent job at making League of Legends, which was somewhat popular in China, into the most popular game in China. It’s an example of Tencent doing what they do best with their partners. Now with Supercell, Tencent have the opportunity again to “do what they do best” and make Clash of Clans, a somewhat successful game in China, into the most successful game in China. Tencent also have the opportunity to learn from Supercell as well, no doubt about that. What Supercell have done in the last few years is extremely impressive and many would jump at the chance to be able to learn from them.
Tencent are also making a smart move by increasing their mobile game portfolio. Mobile gaming is still set to grow and Supercell are on track to see revenues grow this year. On the flip side, the number of PC gamers in China has stopped growing and revenues for PC gaming have remained somewhat stagnant in recent years. With this move, Tencent are pushing Mobile gaming revenues higher than PC gaming revenues (In the company) and setting up a future where Mobile games is the biggest and fastest growing segment for the entire company.
Overall it’s another great investment for Tencent in the gaming sector, not only are they acquiring the Supercell IP, employees and know how, but they’re also acquiring the over 100 million people who play Supercell games every day. That makes these IP very valuable and there is definite room for expansion of these IP into other Entertainment areas, whether it be e-sports, movies, comics, merchandise etc….
However, as positive as this article has been, there are some concerns with this deal and just how big of a return it will generate for Tencent. Tencent didn’t really over pay for Supercell at all, instead some will say that the price Tencent paid is quite reasonable. However there is an over reliance on a small number of hit titles from Supercell to generate high profits. Should just 1 of the games start to lose users at a rapid pace, Supercell could start to see revenue and profit decline sharply, especially if they have no new hit title to replace the old one. Also the cost of developing new games, maintaining current games and user acquisition costs continue to increase. This means that Supercell could see the same revenue in 2016 that they generated in 2015 but the costs could be much higher leading to a lower operating Income. Ultimately there are many scenarios in that Supercell could go from a huge revenues to low revenues in a short amount of time.
So far the company has another hit on its hands with Clash Royale and other games are performing fine so it seems that the company will continue to grow this year. How long they can continue growing for is another question in itself though. So far, Supercell have been able to prove that hit mobile games can continue to engage users for a very long time, three years in the case of Clash of Clans. They are also looking into new ways to increase user engagement and spend, through e-sports for example. If Supercell can continue to overcome consumer fatigue and introduce new ways to keep users engaged, then the deal will have been a huge success for Tencent. If not then it may look like Tencent have just spent $8.6 billion on a company that were at their peak last year.
Another risk that hasn’t been talked about as much is the risk that the talented staff at Supercell may decide that now is a good time to leave the company, perhaps to create their own start up. Tencent say they want to continue to encourage strong employee evolvement through share incentives where employees will be able to sell shares to Tencent at their current value. A few may decide to take the money and leave, especially if they feel the whole Tencent thing isn’t working out. The biggest issue here is that Supercell could lose some key team members and be unable to replace them. It’ll be interesting to watch this.
With this deal closing in August, Tencent are now huge. In fact they’re bigger than huge, their game software revenues will be higher than Activision Blizzard and Electronic Arts combined. Speaking of Activision, the King deal was more about Activision buying themselves into Mobile. With this deal, Tencent are not buying themselves into mobile as they already do well with mobile. What this deal is doing is solidifying their position in Mobile, making them the number 1 mobile game publisher, and allowing them to achieve a direct presence in the West in Mobile gaming.
Tencent now dominate the entire gaming market and it’s not just because of the Supercell acquisition. It’s much more than that. First of all, Tencent’s mobile presence is already huge as I mentioned earlier. Tencent are already the number 1 mobile publisher in China and 10 of the top 30 mobile games in China are published by them. With Supercell they also have a huge presence in the West and become one of the top publishers there. In PC Gaming they have a huge number of Internal IP’s and Partner IP’s like League of Legends, Crossfire and Dungeon Fighter Online that do well in China making them the number 1 PC publisher there. The success of League of Legends in the West also means that Tencent are one of the biggest PC game publishers in the West too.
But it doesn’t end there. Tencent hold stakes in mobile companies like Glu Mobile, Miniclip, CJ Games and many others that have seen good levels of success. They outright own Riot Games in the PC games sector and hold a nearly 25% stake in Activision Blizzard and a 40% stake in Epic Games. In short, not only do Tencent have their hugely successful internal games in China, they now own the number 1 PC game company (Riot Games) and number 1 mobile game company (Supercell), they also publish some of the most popular games in China which have been developed by partners, and finally, they hold a stake in pretty much every gaming company you can think of.
Who will Tencent buy next?