Media and Games Invest — Acquisition of KingsIsle Entertainment

MGI – Media and Games Invest (OMX: M8G)

Last close As at 22/05/2024

EUR1.50

0.35 (30.21%)

Market capitalisation

EUR235m

More on this equity

Research: TMT

Media and Games Invest — Acquisition of KingsIsle Entertainment

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.

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Written by

TMT

Media and Games Invest

Acquisition of KingsIsle Entertainment

Software & computer services

Scale research report - Flash

19 January 2021

Price

€2.85

Market cap

€334m

Share price graph

Share details

Code

M8G

Listing

Deutsche Börse Scale/
Nasdaq First North Premier

Shares in issue (before the transaction)

117.1m

Net debt at 6 October 2020

€49.3m

Business description

Media and Games Invest (MGI) is a fast-growing and profitable digital games company with a strong, supportive media unit. The company combines organic growth with value-accretive acquisitions to deliver strong and sustainable earnings growth.

Bull

Experienced management team with a proven buy-and-build M&A track record.

Capitalising on surge in gaming demand and long-term growth trends.

43% forecast revenue CAGR FY15–20.

Bear

After a period of rapid transformation, the group structure is only starting to settle.

Debt levels remain elevated, towards the top of management’s 2–3x EV/EBITDA guidance.

MGI’s portfolio is PC focused, with mobile an area of future strategic development.

Analysts

Richard Williamson

+44 (0) 20 3077 5700

Dan Ridsdale

+44 (0) 20 3077 5700

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.

Consensus estimates

Year
end

Revenue
(€m)

Adj. EBITDA*
(€m)

PBT
(€)

EPS
(€)

EV/adjusted EBITDA* (x)

P/E
(x)

12/18

32.6

13.4

0.7

0.01

28.4

N/A

12/19

83.9

18.1

(0.8)

(0.01)

21.0

N/A

12/20e

130.3

24.5

3.1

0.03

15.6

95.0

12/21e

143.0

29.3

6.8

0.05

13.0

57.0

Source: MGI accounts (historical figures), Refinitiv consensus (forecasts). Note: *EBITDA adjusted for one-off M&A and financing costs.

General disclaimer and copyright

This report has been commissioned by Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by Media and Games Invest. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by Media and Games Invest. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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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