Why did Tencent buy nearly 30% of a Norwegian game maker?

Tencent (OTC: TCEHY) recently agreed to purchase a 29% stake in Funcom (OTC: FCMKF), best known for his Conan the Barbarian games, to become the largest shareholder in the Norwegian game developer. The Norwegian company KGJ Capital AS, Funcom’s main investor, will sell its entire stake to Tencent.

The deal values ​​Funcom at 1.22 billion Norwegian kroner ($134 million), a 22% premium to its closing price last Friday, and involves Tencent paying around 354 million kroner ($39 million). dollars) for KGJ’s participation.

Image source: Funcom.

Funcom CEO Ruin Casais says the company is “very happy to see Tencent become the largest shareholder” as it has a “reputation for being a responsible long-term investor and for its renowned operational capabilities in online games. line”. Let’s see how Funcom could bolster Tencent’s core gaming business.

What does Funcom bring to the table?

Funcom’s total revenue grew 46% to $33.8 million last year, fueled by the strength of Conan Exiles, Conan’s era, Legends of the Secret World, and online anarchy. Its net profit rose 22% to $6 million.

At the end of 2018, he launched a new shooting game called Mutant Year Zero: Road to Eden, and unveiled its next title Conan, the real-time strategy game Undefeated Conan. It will launch a “cosmic horror” game called madness moons this Halloween, the cartoonish hack-and-slash game Conan Chop Shop in 2020, and a new game based on the sci-fi classic Dunes.

Funcom’s revenue jumped 117% year-over-year to $5.8 million in the first quarter, thanks to the strength of Conan Exiles and Mutant Year Zero, but fell 42% year-on-year to $8.9 million in the second quarter due to a difficult comparison with the launch of Conan Exiles during the quarter of the previous year.

Funcom’s profit plunged 91% annually to $281,000 in the first half of 2019 due to higher development and marketing costs. Teaming up with Tencent, the world’s largest game publisher, could ease some of that pain.

Another part of Tencent’s gaming portfolio

Funcom’s business is tiny compared to Tencent’s gaming unit, which generated 77.8 billion yuan ($10.9 billion) in mobile game revenue and 50.6 billion yuan (7. $1 billion) in PC gaming revenue last year.

Therefore, Tencent’s investment in Funcom is unlikely to move the needle on its own. The value of the investment, at $39 million, is also small change for a company that ended the first half of 2019 with 122.8 billion yuan ($17.2 billion) in cash and cash equivalents.

Conan Exiles.

Image source: Funcom.

However, Funcom represents another part of Tencent’s large portfolio of investments in high-growth game companies. He already has League of Legends developer Riot Games, clash of clans manufacturer Supercell, nearly half fortnite manufacturer Epic Games, a significant stake in PUBG Bluehole maker, investments in gaming giants ActivisionBlizzard and Ubisoft, and stakes in other game makers.

In short, if there’s a hot game anywhere in the world, Tencent wants a piece of the action. Investing in foreign game makers also diversifies Tencent’s gaming business outside of China — which is the world’s biggest gaming market, but also highly vulnerable to censorship and regulatory crackdowns.

For example, Chinese regulators froze new game approvals for nine months last year over concerns about gambling addiction. State-backed media also pilloried Tencent for fueling that addiction with its best mobile game, honor of kings (known as Arena of Valor abroad), which forced him to put playing time limits in place for young players.

Tencent restructured its business last year to reduce reliance on games and prioritize growing its WeChat, cloud and fintech units, but its games business still generated almost a third of its revenue last quarter. .

How Funcom Could Help Tencent

Tencent probably invested in Funcom because it saw the long-term value of the Conan franchise, which has remained consistently popular for over 80 years, and it was impressed with the growth of its Conan games and its expanding pipeline of titles.

The investment also gives Tencent another foothold in overseas gaming markets, as well as more licensed overseas games for Chinese gamers – which would diversify its domestic business away from top games like honor of kings and game for peace.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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