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Research: TMT
Media and Games Invest (MGI) has announced the acquisition of US-based KingsIsle (online PC games Pirate101, Wizard101) for a cash consideration of US$126m plus a cash earn-out of up to US$84m (up to US$210m in total). FY21 guidance for KingsIsle is for revenues of US$32m and adj. EBITDA of US$21m (68% adj. EBITDA margin). The fixed cash consideration represents an EV/adj. EBITDA multiple of 6.0x, with a range of 5.8–7.3x including the earn-out. This is a major, transformative acquisition for MGI, struck at an attractive multiple (6–7x FY21 adj. EBITDA) given the high multiples seen elsewhere in the games sector. Assuming MGI can deliver similar efficiencies to previous acquisitions, there should be further EBITDA upside from the transaction, with the potential for mobile and console launches based on the IP from FY22.
Written by
Media and Games Invest |
Acquisition of KingsIsle Entertainment
Software & computer services |
Scale research report - Flash
19 January 2021 |
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Media and Games Invest (MGI) has announced the acquisition of US-based KingsIsle (online PC games Pirate101, Wizard101) for a cash consideration of US$126m plus a cash earn-out of up to US$84m (up to US$210m in total). FY21 guidance for KingsIsle is for revenues of US$32m and adj. EBITDA of US$21m (68% adj. EBITDA margin). The fixed cash consideration represents an EV/adj. EBITDA multiple of 6.0x, with a range of 5.8–7.3x including the earn-out. This is a major, transformative acquisition for MGI, struck at an attractive multiple (6–7x FY21 adj. EBITDA) given the high multiples seen elsewhere in the games sector. Assuming MGI can deliver similar efficiencies to previous acquisitions, there should be further EBITDA upside from the transaction, with the potential for mobile and console launches based on the IP from FY22.
Mature PC titles with mobile/console upside
KingsIsle’s flagship title is the MMORPG Wizard101 (launched in 2008), supported by Pirate101 (launched in 2012). Wizard101 and Pirate101 generate revenues almost exclusively from North America. With the mobile rights for Wizard101 and Pirate101 included in the transaction, there is future growth potential from launching the games on console and mobile from FY22.
9M20: 28% pro-forma group adj. EBITDA margin
With sustainable revenues and a 9M20 adj. EBITDA margin of 66% (MGI 9M20: 21%), KingsIsle strengthens MGI’s quality of earnings, delivering pro-forma margins of 28%. MGI generated €19m of adjusted EBITDA and KingsIsle €12m during the first nine months 2020; on a proforma basis, MGI's 9M20 EBITDA rises by c 60%, to €31m, even after normalising KingsIsle’s earnings for the positive effect of COVID-19. The transaction is expected to be earnings enhancing from day one.
€25m placing to Oaktree at €2.14 per share
To fund the transaction, MGI placed 11.7m shares at €2.14 per share (a 4% discount to the prevailing price) to Oaktree Capital Management, generating proceeds of €25m. Holding c 9% of MGI, Oaktree is expected to be an anchor investor for MGI over a three- to five-year investment horizon.
Valuation: Attractive growth fundamentals
Although MGI’s net leverage ratio is at the top end of management’s target range of 2–3x, with strong cash flows it is expected to reduce to the lower end over the next 12–18 months. MGI’s underlying growth remains attractive (43% revenue CAGR FY15–20 based on consensus), supported by M&A. Multiples should continue to normalise towards peer averages as investors become more familiar with MGI.
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Consensus estimates
Source: MGI accounts (historical figures), Refinitiv consensus (forecasts). Note: *EBITDA adjusted for one-off M&A and financing costs. |
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Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.
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