In a similar previous post about Why Activision Blizzard Acquired King, I suggested that additional megadeals are just around the corner…. and here we go… today Tencent announced that it will be acquiring control in Supercell at a $10.2B valuation.
Supercell also announced that they will be able to continue to operate as an independent unit under Tencent. I think this is a smart move for both sides given that Supercell is known for its unique team structure and company culture, both of which, drive their ongoing success.
The below is a “quick and dirty” review of some of the strategic reasoning that drove this deal.
Disclaimer: all opinions are my own.
So why Did Tencent buy Supercell?
To increase their global market share: Tencent is already the largest games company on the globe and even before owning Supercell their share of global market is substantial for any one company. While Tencent generated more than $8.7BN of revenues in 2015, Supercell generated $2.3BN potentially bringing them to a combined revenue of over $11BN. That’s a staggering 11% of the global games market which generated a total of $91BN in 2015.
To increase their EBITDA: Supercell generated almost $1B of EBITDA in 2015, and we can assume that 2016 will be even a better year given the company’s growth via Clash Royal. Acquiring Supercell would add that EBITDA to Tencents financials and strengthen its financial position. Of course this benefit is subject to the financing structure of the deal itself which would bring with it financing costs. Tencents ability to make this a successful deal would rely on the fact that Supercell would be able to generate enough cash over the coming years to pay for the financing.
To become a “Mobile First” games company: Though Tencent leads the global games market, the market itself has been shifting towards mobile over the past few years. Mobile games are the fastest growing segment in the industry and are expected to generate more than 35% of global games revenues in 2016 (estimated at around $99.5B). Tencent “only” generates about a third of its games revenues from mobile platforms at the moment and the rest being mostly from web based MMOGs. With Supercell in its portfolio, the share of mobile revenues from Tencents games would be more than 50%, formally making it a mobile first company and thus on track to maintain its global leadership in the games market. The fact that engagement in Tencents MMOG’s have been in decline (probably because users are shifting to mobile) further strengthens their need to make a stronger move into mobile.Source: Bloomberg
To diversify their risk: It’s no secret that the Chinese economy is in a general downturn. This increases the risk profile of Tencent given that it is exposed to macroeconomic market changes. Tencent is China’s largest digital company and owns many of China’s leading online platforms (QQ, Wechat, and more). As the Chinese market moves from superfast growth to slower growth revenues from online advertising, e-commerce and social networks are already affected due to “a challenging macroeconomic environment” (Tencent Financials). This trend is expected to continue in the near future. Further strengthening its non-chinese revenue by acquiring Supercell would essentially act as a move to lower this potential risk and hedge against the Chinese downturn.
Because they can create an upside via cross promotion in China: Supercells games are one of the only western games that has been able to top the charts in China. This proves the Supercells games have a market in China. Once Tencent will put its full weight behind Supercells games via cross promotion on its existing games and social networks in China, we can assume that Supercells games will further dominate the top grossing ranks and will enjoy from a wider distribution on China’s multiple app stores and games platforms.
To learn from the one of the best games companies in the world: Supercell is one of a handful of companies in the world that have been able to achieve such amazing success in the games industry. Generating over $2.3B of revenue with only 180 employees and only 4 games. How do they do it? What’s their secret sauce? That’s what Tencent is looking to answer and their goal will be to learn, replicate, and repeat the success in other teams within Tencent. Of course that’s easier said than done but we can assume that knowledge sharing is one of the goals of such a deal.