Tencent seals deal to buy Supercell for US$8.6 billion

Beijing / Bloomberg

Tencent Holdings Ltd. will lead an $8.6 billion acquisition of gamemaker Supercell Oy, getting its hands on some of the industry’s most popular mobile titles through potentially its largest-ever overseas deal.
China’s largest internet company is leading a group that will buy 84 percent of Supercell, including shares held by SoftBank Group Corp. and current and former employees. The deal values the Finnish gaming house at about $10.2 billion and adds chart-toppers Clash of Clans and Hay Day to a Tencent portfolio that dominates the Chinese social media scene but made few waves abroad.
Tencent, Baidu Inc. and Alibaba Group Holding Ltd. have embarked on an acquisition spree, seeking content and technology in their tug-of-war over the world’s largest internet population. The Supercell purchase may galvanize a wave of overseas deals as the trio’s ambitions expand beyond a slowing home market — till now, the triumvirate has focused much of its spending domestically.
“The repeated success of Supercell makes it a perfect asset in the Tencent empire,” said Joost van Dreunen, CEO of SuperData Research, a New York-based market researcher. “The market for mobile and online gaming is saturating and, unsurprisingly, has begun to consolidate. Digitalization triggered the evolution of the games industry into a worldwide market governed by titans.”

Atypical Deal
Tencent formed a consortium to take control of Supercell and has begun negotiations with “potential co-investors” to join that group. It expects to eventually keep 50 percent voting rights in that group but will complete the acquisition on its own if necessary, it said.
Tencent, who will distribute Supercell’s games in China, reckons the deal will grant it much wider access to the global mobile gaming market and open up future opportunities for collaboration with other developers.
“We are excited that Supercell is joining our global network of game partners, and will preserve their independence and enhance their advantages,” Tencent President Martin Lau said.
Tencent’s multi-billion dollar outlay is unusual for a company that typically prefers smaller deals or minority stakes in companies. At a $10 billion valuation, Supercell’s price tag outstrips the $5.9 billion Activision Blizzard Inc. agreed to pay for Candy Crush Saga studio King Digital Entertainment Plc in 2015.
The deal values Supercell at just more than four times last year’s revenue, close to its publicly traded peers. Supercell’s revenue surged 36 percent to 2.1 billion euros ($2.4 billion) in 2015.
Supercell’s mobile games employ a “freemium” model where apps cost nothing to download but users can buy perks or special items to gain an edge. That approach has created a string of successes from King’s Candy Crush to Clash of Clans, a mobile battle-strategy game that’s consistently among the top-grossing.
Supercell CEO Ilkka Paananen said on a conference call that remaining independent was very important to a Finnish gaming outfit that in 2010 scrabbled for used desks to fill a one-room office in Espoo. Success came later with Clash of Clans, where users raise barbarian armies, and crop-tending simulation Hay Day. Its games are now played by more than 100 million people each day, Paananen said.
The trigger for the acquisition was when SoftBank told Supercell it wanted to sell down its stake if the developer could find another partner.
“We at Supercell needed to think hard and do some soul-searching,” Paananen wrote in a blogpost. “It became apparent to us that a partnership with Tencent would secure everything that has made Supercell a success.”

Safeguarding a Lead
The acquisition should help safeguard Tencent’s lead in gaming and content over Alibaba and Baidu. Tencent already gets more than half its revenue from games, many designed in-house, and has invested in League of Legends developer Riot Games Inc. and Glu Mobile Inc., the San Francisco-based studio known for smartphone titles featuring Kim Kardashian and Katy Perry. Alibaba’s also invested in gaming, including in U.S. developer Kabam Inc., but Tencent has the advantage of operating China’s most popular messaging services in QQ and WeChat.
“Tencent probably sees this as a reasonable price to pay because games are its most important business,” Marie Sun, an analyst at Morningstar Investment Service, said by phone. “With its vast distribution channels across QQ and WeChat, the company would have many ways to monetize the games that Supercell has.”
The sale will go a long way toward cleaning up SoftBank’s debt-laden balance sheet. It’s part of Masayoshi Son’s effort to focus capital on promising startups. SoftBank has decided that games aren’t a core part of its business and has already agreed to unload game developer GungHo Online Entertainment Inc. while it is raising $10 billion trimming its stake in Alibaba.
Son built his corporate empire by borrowing heavily to finance acquisitions, transforming a humble computer software distributor into a global technology giant. While earlier bets like Alibaba paid off, the purchase of money-losing Sprint Corp. backfired. SoftBank led a deal for 50.5 percent of Supercell in 2013 for $1.53 billion before adding a further 22.7 percent last year.