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Keywords has announced its largest deal of the year so far, the acquisition of High Voltage Software (HVS), a US-based, full-service, work-for-hire, AAA games developer for up to US$50m, payable two-thirds up front, with one-third after 12 months subject to performance conditions. Keywords will make an initial payment of US$33.5m, with US$23.75m in cash. The total consideration represents 5.6x HVS FY21e EBITDA (c US$9m), within Keywords’ target range of 5–7x EBITDA. HVS is Keywords’ fifth deal of the year, the third in games development and its third US-based deal. We suspect Keywords was attracted by HVS’s close relationship with Epic Games, publisher of Fortnite. We have left our FY20 estimates unchanged, but the deal is 8% EPS enhancing based on our revised FY21 estimates.
Written by
Keywords Studios |
Another electrifying M&A deal |
M&A update |
Software & comp services |
16 December 2020 |
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Keywords Studios is a research client of Edison Investment Research Limited |
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Keywords has announced its largest deal of the year so far, the acquisition of High Voltage Software (HVS), a US-based, full-service, work-for-hire, AAA games developer for up to US$50m, payable two-thirds up front, with one-third after 12 months subject to performance conditions. Keywords will make an initial payment of US$33.5m, with US$23.75m in cash. The total consideration represents 5.6x HVS FY21e EBITDA (c US$9m), within Keywords’ target range of 5–7x EBITDA. HVS is Keywords’ fifth deal of the year, the third in games development and its third US-based deal. We suspect Keywords was attracted by HVS’s close relationship with Epic Games, publisher of Fortnite. We have left our FY20 estimates unchanged, but the deal is 8% EPS enhancing based on our revised FY21 estimates.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
250.8 |
37.9 |
45.5 |
1.61 |
62.0 |
0.06 |
12/19 |
326.5 |
40.9 |
48.8 |
0.58 |
57.8 |
0.02 |
12/20e |
367.0 |
52.0 |
58.0 |
0.00 |
48.6 |
0.00 |
12/21e |
454.3 |
66.8 |
70.6 |
1.91 |
40.0 |
0.07 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
High Voltage Software: US games developer
HVS is based in Chicago and New Orleans and is Keywords’ largest acquisition of the year. HVS has a 27-year history, working on over 100 games across multiple genres and platforms, including franchises such as Fortnite, Saints Row, Mortal Kombat, Hunter the Reckoning, The Conduit and Lego Racers. The HVS team has worked closely with Epic Games on Fortnite, meaning it has expertise with Epic’s Unreal Game Engine.
Acquisition multiple of 5.6x FY21e EBITDA
Keywords will make an up-front payment of US$23.75m in cash and US$9.75m in shares, together with deferred consideration of up to US$16.5m (in a mix of cash and shares), based on performance conditions to 31 December 2021. Total consideration represents a multiple of 5.6x HVS FY21 EBITDA (c US$9m), within management’s target acquisition range. Revenues were not disclosed. We have updated our estimates and calculate that the deal is 8% EPS enhancing based on our revised FY21 estimates. Given the deal is so close to the end of the year, we have chosen not to make any changes to our FY20 estimates.
Valuation: HVS 8% earnings enhancing in FY21
Incorporating HVS into our model, Keywords’ shares trade on a P/E of 40.0x our updated FY21e estimates, falling to 35.1x in FY22e, in line with its UK games industry peers. With substantial net cash after the deal, together with €100m of undrawn facilities, Keywords remains well placed to complete further deals in FY21 and continue to follow management’s proven buy-and-build strategy, with strong organic games industry growth supplemented by M&A.
Exhibit 1: Financial summary
€'000s |
2018 |
2019 |
2020e |
2021e |
2022e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
250,805 |
326,463 |
367,011 |
454,304 |
508,821 |
Cost of Sales |
(154,997) |
(206,234) |
(228,363) |
(281,462) |
(314,678) |
||
Gross Profit (inc multimedia tax credits) |
95,808 |
120,229 |
138,649 |
172,842 |
194,143 |
||
EBITDA (adjusted) |
|
|
43,729 |
57,611 |
69,910 |
88,661 |
99,631 |
EBITDA (reported) |
|
|
34,304 |
43,375 |
60,198 |
76,833 |
86,621 |
Operating Profit (before amort. and except.) |
|
|
38,916 |
42,983 |
55,521 |
69,261 |
78,131 |
Amortisation of acquired intangibles |
(6,872) |
(7,318) |
(11,324) |
(14,148) |
(15,846) |
||
Exceptionals |
(5,296) |
(4,348) |
(2,370) |
0 |
0 |
||
Other (incl share based payments) |
(4,129) |
(9,775) |
(10,753) |
(11,828) |
(13,011) |
||
Operating Profit |
22,619 |
21,542 |
31,074 |
43,285 |
49,275 |
||
Net Interest |
(1,316) |
(2,513) |
(3,500) |
(2,500) |
(2,500) |
||
FOREX |
791 |
(1,658) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
37,911 |
40,913 |
52,021 |
66,761 |
75,631 |
Profit Before Tax (FRS 3) |
|
|
22,094 |
17,371 |
27,574 |
40,785 |
46,775 |
Tax |
(7,191) |
(7,462) |
(9,488) |
(12,176) |
(13,794) |
||
Profit After Tax (norm) |
30,720 |
33,451 |
42,533 |
54,585 |
61,837 |
||
Profit After Tax (FRS 3) |
14,903 |
9,909 |
18,086 |
28,609 |
32,981 |
||
Average Number of Shares Outstanding (m) |
64.3 |
65.1 |
69.6 |
74.2 |
74.5 |
||
EPS - normalised (c) |
|
|
45.5 |
48.8 |
58.0 |
70.6 |
80.4 |
EPS - normalised fully diluted (c) |
|
|
43.7 |
47.2 |
55.8 |
68.4 |
78.1 |
EPS - (IFRS) (c) |
|
|
23.2 |
15.2 |
26.0 |
38.5 |
44.3 |
Dividend per share (p) |
1.61 |
0.58 |
0.00 |
1.91 |
2.11 |
||
Gross Margin (%) |
38.2% |
36.8% |
37.8% |
38.0% |
38.2% |
||
EBITDA Margin (%) |
13.7% |
13.3% |
16.4% |
16.9% |
17.0% |
||
Operating Margin (before GW and except.) (%) |
15.5% |
13.2% |
15.1% |
15.2% |
15.4% |
||
PBT Margin (%) |
15.1% |
12.5% |
14.2% |
14.7% |
14.9% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
198,215 |
223,992 |
249,339 |
259,456 |
261,157 |
Intangible Assets |
180,086 |
196,769 |
220,643 |
222,368 |
213,981 |
||
Tangible Assets |
15,002 |
22,163 |
23,636 |
32,028 |
42,116 |
||
Investments |
3,127 |
5,060 |
5,060 |
5,060 |
5,060 |
||
Current Assets |
|
|
100,348 |
120,483 |
224,162 |
261,251 |
316,745 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
37,019 |
43,243 |
46,785 |
52,399 |
58,687 |
||
Cash |
39,870 |
41,827 |
139,064 |
165,941 |
209,999 |
||
Other |
23,459 |
35,413 |
38,313 |
42,911 |
48,060 |
||
Current Liabilities |
|
|
(95,031) |
(49,551) |
(49,948) |
(33,311) |
(26,102) |
Creditors |
(54,960) |
(49,471) |
(49,868) |
(33,231) |
(26,022) |
||
Short term borrowings |
(40,071) |
(80) |
(80) |
(80) |
(80) |
||
Long Term Liabilities |
|
|
(11,158) |
(71,528) |
(71,194) |
(73,194) |
(75,194) |
Long term borrowings |
(230) |
(59,671) |
(59,671) |
(59,671) |
(59,671) |
||
Other long term liabilities |
(10,928) |
(11,857) |
(11,523) |
(13,523) |
(15,523) |
||
Net Assets |
|
|
192,374 |
223,396 |
352,358 |
414,202 |
476,606 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
33,954 |
46,069 |
66,181 |
79,833 |
88,478 |
Net Interest |
(502) |
(9,411) |
(6,263) |
(3,425) |
(2,276) |
||
Tax |
(6,304) |
(13,288) |
(9,488) |
(12,176) |
(13,794) |
||
Capex |
(9,440) |
(13,145) |
(11,083) |
(18,293) |
(20,488) |
||
Acquisitions/disposals |
(25,766) |
(27,762) |
(39,109) |
(17,637) |
(8,289) |
||
Financing |
0 |
0 |
97,000 |
0 |
0 |
||
Dividends |
(1,080) |
(1,197) |
0 |
(1,425) |
(1,574) |
||
Net Cash Flow |
(10,090) |
(18,734) |
97,238 |
26,877 |
43,057 |
||
Opening net debt/(cash) |
|
|
(11,094) |
431 |
17,924 |
(79,314) |
(106,191) |
Forex gain on cash |
(3) |
1,293 |
0 |
0 |
0 |
||
Other |
(1,432) |
(52) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
431 |
17,924 |
(79,314) |
(106,191) |
(149,248) |
Source: Company accounts, Edison Investment Research
|
|
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