M&A

Unite the clans

Tencent swoops for Softbank’s stake in game maker Supercell

Clash of Clans w

Under new ownership

In 2013 Softbank struck a deal to buy a 70% stake in the American telco Sprint Nextel for $22 billion. It was Japan’s biggest overseas acquisition but it hasn’t worked out. Sprint has been losing share in the US and its debt has ballooned to $33 billion.

That has put Softbank under funding pressure too. The company said in May that it will sell shares worth at least $7.9 billion in Alibaba and now it has agreed to raise another $8.4 billion through a disposal to another Chinese internet giant, this time by selling its majority stake in Finnish game developer Supercell to Tencent.

Supercell is best known for its Clash of Clans gaming app. Softbank bought the company for $1.5 billion three years ago and the Tencent bid now values the firm at a little over $10 billion. The Shenzhen-based tech giant is purchasing Softbank’s entire 84% stake and the remaining shares will continue to be held by Supercell’s staff.

Sina Technology says the deal is Tencent’s biggest overseas acquisition to date and that it has picked a good time to make the offer because the Japanese firm is under pressure to cut debt.

Supercell has been valued at 10 times 2015 earnings, which compares favourably (for the purchaser) with an average of about 20 times for other online game providers. But some still wonder whether Tencent has overpaid, including the Wall Street Journal’s Jacky Wong, who points out that “it would take 12 years of Supercell’s earnings last year to pay back Tencent’s investment”.

Another concern is that game players are a fickle audience and that it is difficult to keep their attention for long, even for the most popular titles.

Tencent will also need to hold onto Supercell’s 100 or so staff and the Hong Kong Economic Journal reckons that managing the cultural transition to Tencent ownership might be a challenge. “Some people even compare it to the acquisition of IBM’s PC business by Lenovo 11 years ago,” it notes. “Tencent might suffer the same embarrassment – Lenovo faced a crippling industry downturn [in the PC market] after the acquisition.”

Tencent seems to have anticipated such concerns. “Supercell will retain its independent operations, the headquarters will remain in Helsinki, Finland and its existing team will continue to run all operations of the company,” it said in a statement.

Tencent’s bet is that it can generate a return simply by introducing games from the Clash of Clans franchise to millions of its customers on its messaging app WeChat and its internet portal QQ. Another reason for swooping for Supercell’s popular gaming apps is that Tencent is broadening its market exposure beyond its Chinese base, where it makes most of its money.

Chin Hao, a tech blogger, writes that Tencent has invested nearly Rmb50 billion ($7.6 billion) on acquisitions since 2010, including a number of gaming firms. The best payback has come from a relatively small deal in 2011, when it paid $230 million for a 93% stake in Riot Games. The developer’s blockbuster product is League of Legends and the game’s 67 million monthly users helped Tencent to earn $9 billion in gaming revenue last year.

“A tournament of the game this summer was watched by 220 million people, or 10 times the global viewership of the NBA Finals,” Chin says.

As WiC has reported, ‘super IP’, or money-spinning intellectual property that can be cross-sold to consumers, has been this year’s buzz concept for Chinese entrepreneurs lately (see WiC327). Tencent will be hoping that the Clash of Clans brand can be exploited in a similar way by converting it into entertainment content and merchandising items. Indeed, the Tencent-backed movie World of Warcraft, which was adapted from a popular online game, has been setting Chinese box office records since its release last month (see WiC328).


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