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Tencent (TCEHY) in Exclusive Talks to Buy Gaming Firm Leyou

Zacks Equity Research

Tencent TCEHY is in exclusive talks to acquire Leyou Technologies, a Hong Kong-listed games developer. Leyou and its controlling shareholder, Charles Yuk, have entered into an exclusivity agreement with Tencent Mobility Limited, a Tencent subsidiary.

Tencent Mobility is looking to buy Leyou and take it private. Per the exclusivity agreement, Leyou cannot negotiate with another potential buyer in the next three months while the Tencent talks are ongoing.

Acquisition of Leyou would help Tencent further expand the number of games under its huge umbrella. Tencent can capitalize on Warframe and other properties on mobile. With 60 million registered players, Warframe has proved its capability to bring in players.

Tencent Holding Ltd. Price and Consensus

Tencent Holding Ltd. Price and Consensus

Tencent Holding Ltd. price-consensus-chart | Tencent Holding Ltd. Quote

Acquisition to Aid Portfolio Expansion

Leyou has a number of subsidiaries, which make video games. Over the years, it have acquired Digital Extremes (creator of Warframe), Splash Damage (creator of Gears Tactics), Radiance Games, and Kingmaker. Splash Damage is also currently working with Microsoft MSFT on Gears Tactics and Google Stadia on an unannounced project.

Leyou also invested owns a 20% minority stake in Certain Affinity, which is developing a Transformers online game, and more recently launched the publishing label Athlon Games, which is known to be working alongside Amazon’s Game Studios on a new Lord of the Rings MMO.

More recently, Athlon Games became the worldwide publisher of Samurai Shodown and is a publishing partner of LCG Entertainment, which has revived several Telltale Games properties following the company's collapse.

Aggressive Expansion Strategy to Increase Competition

In the past few years, Tencent has bolstered its gaming portfolio via investments in other firms. The company already owns Riot Games, Funcom and Sharkmob, as well as stakes in developers such as Supercell (84%), Grinding Gear Games (80%), Epic Games (40%), Marvelous (20%), Netmarble (over 17%), Kakao (over 13%), Sumo Digital (10%), Frontier Developments (9%), Activision Blizzard (5%), Paradox Interactive (5%), Ubisoft (5%), and Bluehole (1.5%).

Tencent is also invested in PlatinumGames and YAGER and recently acquired System Shock 3 from Otherside Entertainment.

Last week, Tencent launched a studio in California, as part of its strategy to expand and bring 50% of its gaming revenues from international market. Markedly, former Rockstar Games veteran, Steve Martin, will head the new studio — LightSpeed LA — which will focus on the creation and publishing of AAA titles.

Moreover, last month, Tencent announced plans to launch more than 40 game products, including the release of Mobile Dungeon & Fighter and an unnamed Metal Slug mobile game. Tencent also announced a cross-platform Pokemon game running on Nintendo's Switch console and mobile.

However, this Zacks Rank #1 (Strong Buy) company faces increasing competition from China-based rival NetEase NTES, Microsoft, and Alphabet GOOGL owned Google Stadia. NetEase carried out a secondary listing in Hong Kong, last month, raising 21.09 billion Hong Kong dollars ($2.7 billion) for international expansion in the global games market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Microsoft and Google have a much larger reach than Tencent, currently. Google’s worldwide data centers make using Stadia a smooth experience. Microsoft’s expansive Azure cloud infrastructure is keeping xCloud strong. Nonetheless, Google’s cloud services have no presence in China.

Moreover, Google’s Stadia has been receiving tepid reviews from gamers who are unsatisfied with its unstable gameplay. Further, gamers are required to buy the games they want to play on Stadia.

Meanwhile, Tencent is trying to integrate its cloud gaming services into its video streaming platform, Tencent Video, and messaging platforms, QQ and WeChat, which have a monthly active user reach of 731 million and 1.15 billion, respectively. If this is achieved, Tencent will have a strong competitive edge over Google Stadia.

Further, Tencent has been tacitly testing a mobile-based streaming network — Trovo Live — in collaboration with a U.S.-based affiliate since early 2020.

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