Take-Two Interactive acquires Spanish mobile game publisher Social Point for up to $276 million.

Authors: Steve Payne & John Ascher-Roberts

Transaction Overview

On February 1, 2017, Take-Two Interactive (NASDAQ: TTWO), announced an agreement to acquire Barcelona-based mobile game publisher Social Point for $250 million and another $25.9 million in potential earnouts.

Target Description

Social Point develops mobile, action, social, and strategy free-to-play games. Its most popular game offerings are Dragon City and Monster Legends, each of which have been downloaded more that 180M times and have been frequently counted on the top grossing app charts, according App Annie.  Dragon City has over 25 million monthly active users.  The company generated $90.8M in net revenue, 90% of which came from mobile games, with $19.9M in EBITDA for calendar 2016, according to Take-Two.  Revenues have grown 29% per year since 2013.  Social Point is one of only six publishers that have had at least two games simultaneously in the App Store’s annual top-100 grossing mobile games chart every year since 2014.  Roughly half of Social Point’s revenues are from the U.S., and the company has not yet targeted Asia, the largest market for mobile games.  Its competitors include Electronics Arts, King Digital, Rovio Entertainment, Wooga and Zynga.

Horacio Martos, co-CEO, Andrés Bou, co-CEO, and Marc Canaleta, CTO, founded the company in 2008.  It received $44.7M in funding from 83 North (Arnon Dinur), BBVA, Greylock Partners, Highland Capital Partners (Laurence Garrett, Tony Zappala), Idinvest Partners and Nauta Capital.  Social Point has 270 employees.

Buyer Description

Take-Two is a multinational video game developer and publisher based in New York.  It conducts business through its two wholly-owned game labels: 2K Games and Rockstar Games.  It develops and publishes AAA action/adventure products primarily for console and PC platforms under the Rockstar Games label with popular titles such as Grand Theft Auto, Max Payne, Midnight Club, and Red Dead Redemption; and publishes sports/action games through its 2K label with popular titles such as NBA 2K, WWE 2K, and NHL 2K.  Its competitors include Activision Blizzard, Electronic Arts, and Ubisoft.

Take-Two Interactive has a market cap of $4.7B with LTM revenues of $1.5B.

Transaction Parameters

Take-Two Interactive is acquiring Social Point for $250 million, of which $175M will be in cash and $75M will be in stock.  Take-Two may also pay also an extra $25.9M in earnouts dependent on Social Point reaching certain revenue goals.

Transaction Value (before earnouts)       $250M
TEV / 2016 Revenue         2.8x
TEV/EBITDA        12.6x
TEV / Invested Capital         5.6x

Comparable transactions include Jam City’s acquisition of TinyCo in July of 2016 (undisclosed), Vivendi’s acquisition of Gameloft in February of 2016 for $535M (2.5x LTM rev), Activision’s acquisition of King Digital in November of 2015 for $5.8B (2.3x LTM rev), Churchill Downs’ acquisition of Big Fish Games in November of 2014 for $835M (2.7x LTM rev), and Electronic Arts’ acquisition of PopCap Games in July of 2011 for $1.3B.

Strategic Rationale

This acquisition will allow Take-Two to at long last diversify its current console and PC revenue streams into the faster-growing $40B mobile gaming segment.  This is a natural progression for the company; something that its bigger rivals have also done, as seen in Activision’s acquisition of King Digital and Electronic Arts’ acquisition of PopCaps.  Additionally, although Take-Two’s most recent earnings report beat the analysts’ consensuses, much of its revenue is still heavily dependent on a few gaming titles with big releases, which can make revenues relatively lumpy.  

Architect Partners’ Observations

This appears to be a reasonably good deal for Take-Two.  The 2.8x multiple of trailing twelve month revenues paid is in line with other similar mobile gaming transactions over the past few years.  And Take-Two has been trading at a little over 3x TTM revenues, so this is not dilutive, even if full earnout is paid out.

Take-Two CEO Strauss Zelnick had previously been skeptical about the mobile gaming market, due to its high failure rate, so this transaction represents a change of direction.  On one hand, Social Point has had a strong track record as one of few publishers to have two games on the top 100 list since 2014.  And they have shown above-average conversion from freemium to paid play.  On the other hand, Social Point has had fewer hits over the past two years, so performance may be slowing.

Finally, Take-Two’s real strategy here is not clear.  Some commentators have suggested that Take-Two plans to bring some of its console hits to the free-to-play mobile market.  But given the fact that the two companies participate in different game genres, others predict that this is just a sector bolt-on acquisition.

Source: Architect Partners