EQT is Trying to Close a Rare Gaming Industry Deal

You’re reading Value Add’s weekly briefing, the leading newsletter for the operating side of private equity. Here’s what you need to know this week, from new insights for PE-backed executives and portco news to recent buyouts and investment trends. 

Insights

Chart of the Week: One notable observation about Carlyle’s portfolio operations team is its extensive experience. On average, a Carlyle operating executive has 34 years of professional experience, with 29 of those years spent in industry. In contrast, a managing director at KKR Capstone typically has 21 years of experience, with only three years in industry. This highlights Carlyle’s greater emphasis on industry tenure for its executives, unlike KKR and Blackstone, which are more open to candidates from diverse backgrounds, including MBB consulting and private equity investment roles. (Read More)

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• Private Equity Case Study: BJ’s Wholesale (Read)
• Energy Sector Private Equity Report (Read)
• CEO Turnover is Highest in PE-backed Tech Buyouts (Read)

Spotlight

What’s the deal? EQT is in talks to acquire Keyword Studios for $2.5 billion. The company provides technical and creative services to the gaming industry, such as game production, translation, and sound effects. Keywords’ share price has dropped about -30% from its all time high in September 2021, although recent talks of a potential takeover have been a material boost. EQT has until July 3rd to make a formal offer or withdraw from takeover talks. It’s worth noting that in the past, Keywords has rejected four acquisition approaches from EQT. 

Company performance. Keywords Studios is currently experiencing a period of slowed content creation which is negatively affecting operating margins. The company’s growth in the first half of 2024 was also impacted by the cancellation of several big game development projects, partly due to lagging content production in Hollywood. 

In the company’s recent financial update, Keywords reported annual revenue of $837 million — indicating growth of +13% year-over-year. Organic revenue growth was +9% (excluding impacts from foreign exchange and Hollywood strikes). The company also reported an adjusted operating profit of around $131 million, representing a margin of 15.6%. 

In 2023, Keywords completed five acquisitions totaling $241 million. Notably, it acquired Multiplayer Group for $83 million which expanded the company’s reach in high-end and creative services. Keywords ended 2023 with a net debt position of $73 million, providing flexibility and opportunity for future M&A investments. 

For 2024, the company expects both revenue and profit growth, primarily driven by improvements in organic growth, additional M&A activity, and driving savings that will grow adjusted operating profit margins to above 15%. Organic growth is expected to improve as the overall industry’s demand for new content recovers and as Hollywood production picks up post-2023 strikes.

Private equity’s history in gaming. PE and VC funding for video game companies decreased by over -80% in 2023, totaling $1.4 billion as compared to $7.5 billion in 2022. The interactive home entertainment sector (i.e. video game publishers and developers) experienced total funding of $3 billion in 2023, the lowest this number has been since 2020. PE-backed rounds accounted for roughly 46% of that total. In 2022, the same sector raised $11 billion, with PE funding making up 71% of that.

In Q1 2024, we started to see some growth. Total video game funding rounds rose to $2 billion versus $900 million in Q1 2023. However, PE funding dropped to $380 million from $410 million in the same period. Despite these numbers, growth opportunities in the gaming market have recently increased after a shift towards streaming models and mobile gaming, making the Keywords deal quite interesting.

Below, are some recent investments by PE, VC, or other corporates in the gaming industry:

• Candivore Ltd.: In August 2023, Candivore Ltd. raised $100 million from Haveli Investment Management LLC, O.G. Tech Partners, and Union Tech Ventures.
• Build A Rocket Boy: In January 2024, Build A Rocket Boy Ltd. secured $110 million, led by RedBird Capital Partners LLC, with additional investments from Galaxy Interactive, NetEase Inc., and others.
• Epic Games: In February 2024, Epic Games Inc. raised $1.5 billion from Walt Disney Co., marking the largest funding round since 2023.

As the industry shifts towards new and emerging market trends, there is certainly potential for a renewed innovation and investment opportunity, making it an exciting time for stakeholders in the gaming industry. 

Buyout News 

PAI Partners is bidding to acquire Avatel, Spain’s fifth largest telecom company, at a valuation near $600 million. Avatel has grown through aggressive M&A, acquiring more than 100 regional telecom operators over the past few years. (Source)

EQT is reportedly nearing a deal to acquire a 30% stake in Flix, a German bus operator that owns Greyhound in the US, at a $3.2 billion valuation. The company was considering an IPO earlier this year. Permira, which also owns a stake in the company, said Flix generated $1.6 billion in revenues last year.(Source)

Blackrock has agreed to acquire Preqin for $3.2 billion. Preqin is a data company for the alternative assets space, providing information about past deals in private equity, venture capital, and other private markets. The acquisition is a sign of Blackrock’s intent to offer investors greater access to private markets. (Source)

New Mountain Capital closed a new flagship fund totaling $15.4 billion. The fund will focus on buyouts in “defensive growth” industries such as healthcare, infrastructure, and financial services. The fund will also invest in technology companies providing critical operations to such industries, such as security and analytics. (Source)

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