Keywords Studios Plc fancied as Liberum expects more M&A in gaming industry


Keywords Studios PLC (AIM:KWS, FRA:KS3, OTC:KYYWF) is fancied as stockbroker Liberum expects to see the heightened level of M&A activity continue in the wake of Tencent’s move for Sumo Group.

For starters, Liberum reckons Sumo shareholders should take their payday and reinvest back into the sector, with Keywords and game developer Frontier Developments (AIM:FDEV) singled out by analysts.

Chinese investment group Tencent last week agreed to pay a premium price in its GBP919bn deal to buy Sumo, comparatively a small peer to Keywords.

Tencent is major player in the industry, with its 40% stake in Fortnite publisher Epic as its most substantial interest – it also owns League of Legends publisher Riot Games, along with stakes in Ubisoft and Activision Blizzard.

The Chinese tech investor and conglomerate has in the past two years either acquired or invested in some 31 video game companies and Liberum expects the Chinese group will continue this trend.

“Looking ahead we would expect Tencent to continue acquiring into the gaming industry, given the sector’s strong growth prospects as well as the company’s own sizeable cash position,” Liberum analyst Olivia Honychurch said in a note.

“Whilst we cannot speculate as to whether they will target developers versus work for hire or services businesses (both in the UK and elsewhere), it seems likely that key rationale for the company includes acquiring top quality talent as well as potentially high value IP.”

“Similarly we would expect other Chinese technology business to continue doing the same going forwards – such as ByteDance and Alibaba – following their own other gaming-related acquisitions.”

It not just the Chinese that are making moves in gaming.

The Sumo deal is the second transaction of similar size this year after Electronic Arts in January took out Warwickshire based Codemasters for a premium, paying GBP954mln to buy the F1 game maker.

The pandemic was a substantial boon for the gaming industry as gamers in lockdown played more and played longer. Not only is it good for cash flow and the bottom line, it has continued to fuel deal making in the sector.

Liberum’s Olivia Honychurch said that the heightened level of deal activity continued and accelerated into 2021. Some US$60bn worth of deals have been agreed in the first half, Honychurch highlighted, which represents around 80% of all of the whole of last year’s tally.

“While clearly the deals completed last year – and already in 2021 – leave a diminishing number of attractive targets within the sector, we believe that the remainder of the year will see a number of new deals, as gaming companies keep consolidating and non-gaming tech businesses remain intent on stepping into the sector,” the analyst said.

“Rationale among developers is likely to focus on IP acquisition as high quality content remains an important tool in attracting new players, whilst growing capacity and market share will be key for work-for-hire and outsourcing businesses.”

Taking it forward to look a stock picks, Honychurch names Keywords Studios and Frontier Developments (AIM:FDEV) as attractive among London’s remaining gaming stocks. Both offer “the most meaningful long-term upside”, according to Honychurch.

AIM-quoted Frontier Developments is described by Liberum as a leading developer of AAA own-IP games with a busy release pipeline (put simply, it has a good portfolio of proprietary games).

Meanwhile, she said that Keywords is positioned as a key beneficiary of the ongoing shift towards outsourcing as well, along with increased workloads driven by new generation consoles and game streaming.

Keywords itself has been a consolidator and deal maker in the sector, picking up many independent studios and businesses around the world in recent years.

Earlier this year, in March, confirmed a strong 2020. It generated some EUR373.5mln of revenue, up 14% year-on-year, and grew pre-tax profit by 34.5% to EUR55mln.

For context, over the same period, Sumo had GBP16.5mln of earnings on GBP68.9mln of revenue.


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