(Bloomberg Opinion) -- An Ubisoft Entertainment SA acquisition of Zynga Inc. could be just what the French computer game company needs to get to the boss level.
Zynga, which makes mobile games such as “Farmville” and “Words With Friends,” has been approached by other developers about a takeover, Bloomberg News reported Tuesday, without identifying the prospective buyers. If Ubisoft isn’t considering the deal, it should.
The Paris-based firm got less than 8 percent of its 1.7 billion-euro ($2 billion) sales last year from mobile platforms, one of the most lucrative parts of the industry. Adding Zynga would increase that more than sevenfold.
The real magic in the deal comes from leverage. Channeling Ubisoft’s existing games, which include “Rainbow Six” and “Assassin’s Creed,” through Zynga’s advertising platform could further turbocharge growth.
It would also help Ubisoft maximize the advantages from its latest major tie-up: Tencent Holdings Ltd. When the Chinese tech conglomerate took a 5 percent stake in March, it also signed a separate deal to operate, publish and promote Ubisoft games in China. Tencent’s ownership of the WeChat social media platform gives it access to more than a billion active users. That amounts to a serious opportunity to squeeze more value out of Zynga’s suite of games.
The main hurdle for Ubisoft would seem to be the cost of a deal. Once again, the main point is leverage. A 20 percent premium to the closing price before the talks were reported would value Zynga at about $4 billion, or about 31 times predicted earnings. Buying it would require a lot of debt.
Ubisoft, whose biggest shareholders are the founding Guillemot brothers, could feasibly offer a 50:50 cash and stock deal for Zynga. By the time you take into account the combined 2019 earnings of the two firms, borrowing a further $2 billion would give it debt of about 2.6 times Ebitda. That’s a bigger ratio compared to its peers, but still digestible, and excludes its existing cash pile of 755 million euros. And the more reliable returns that online gaming can generate, without the peaks and troughs of new release cycles, can encourage bond investors.
Diluting equity through a capital increase might be a concern for the founders, or indeed for Tencent. But there are ways around that. Ubisoft could make available more shares than those simply required to fund the deal, and the Guillemot brothers could buy them.
The dark horse is of course Electronic Arts Inc. It could fund a deal from its existing balance sheet, and since Zynga appointed Frank Gibeau chief executive officer in 2016, the former EA executive has hired a cohort of other veterans from the gaming giant. But given that EA already has a $672 million mobile business, a deal wouldn’t be quite the same game-changer.
While the transaction looks feasible for Ubisoft, it would nevertheless stretch the balance sheet. The founders therefore have to ensure they remain disciplined, and don’t get dragged into a bidding war. Their track record of sticking to bolt-on acquisitions of less than 100 million euros suggests they’re unlikely to overplay their hand.
As long as Ubisoft can avoid a costly auction, it should consider betting the farm on “Farmville.”
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Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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