Ubisoft Entertainment: Promising Target for Potential Takeover

Ubisoft (Euronext: UBI) is a French video game developer which is one of the largest in the world according to revenue. Ubisoft is developing a number of gaming franchises with long history and large fun base. Such track record is achieved by more than 18,000 employees in studios in more than 20 countries, mostly concentrated in France, Canada, Spain and Germany.

In spite of great products in comparison with main peers UBI has the lowest net income margin, the highest CAPEX / Sales ratio and the lowest FCF yield. At the same time, UBI's forward P/E is comparable with peers’ multiples, which means that if UBI is taken over by a strategic investor and the operating and financial indicators are pulled out in comparison with competitors, it will be possible to release substantial value. Ubisoft can be an interesting target for acquisition due to its professional team, strong brand and reasonable valuation. The Company is mired in reputation issues, therefore, sentiment around the Company is negative, but problems with governance can be solved by buying and optimization. Optimization can be achieved by eliminating reputational discount, reducing duplicate functions, a more commercialized approach to game development, and retaining talented developers.

Despite a long history of video games, modern video games market is developing dynamically, doubling from 2012 to 2019 (it should be noted that gaming industry is bigger than movies and music businesses combined). Amid a series of lockdowns in 2020, consumption of video games reached record value of $178 bln globally (growth rate 23% relative to 2019). According to NewZoo research, it is not predicted a reiteration of such growth rates in the future, but it is expected that by 2023 market value will exceed $200 bln. In context of active market growth and corresponding prospects for activities in this market, M&A transactions are actively being carried out. Transactions are carried out for various purposes: diversification of activities (large companies enter the video games market through acquisitions of existing companies, individual studios, or create in-house teams from scratch), horizontal acquisitions to gain experience and expertise in new genres or types of games, transnational acquisitions for entering a new market.

Given attractive valuation of Ubisoft, the ability to extract value through optimization of activities and broad expertise of the Company, Ubisoft can be considered a target for any of the possible types of M&A. At the same time, history of unsuccessful takeover attempts by Ubisoft suggests that takeover must necessarily be friendly and complimentary in terms of the type of activity of a potential buyer. The current management and the largest shareholder in person of the Guillemot brothers are sensitive to development of the company after a potential merger. As Yves Guillemot said during the saga with Vivendi, the company is ready to consider possible acquisitions, but with companies that understand video game business, or with technology companies for which video game market will not be alien.
As far as size of the largest M&A deals can be judged, current market capitalization (without possible premium for potential deal) of 100% of Ubisoft is comparable with size of deals that took place in 2016 and 2020.

Acquisition of Ubisoft could potentially be of interest to the largest companies in the market (Tencent or Electronic Arts) to increase their market share and strengthen their positions in video game market. Ubisoft may also be of interest to such large technology companies as Alphabet, Microsoft, Meta, Amazon, Netflix, Disney to increase their market presence, or Meta Platforms to develop metaverse space.

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