Malte Paul's Blog

Gameforge, a leading online games company with more than 100 million registered users has announced the takeover of 60% of Frogster AG at €25.00, valuing the company at €70 MM. The transaction makes strategic sense to Gameforge adding further (and new) products to its existing portfolio. However, equity analysts see the share price of €25 as too low and advise existing shareholder not to accept the outstanding takeover offer. The transaction values Frogster at 2.7x Sales 2010E and 10x EBITDA 2010E, respectively. Given the current hype for online gaming companies and the growth profile of Frogster AG, this offer does at least not seem to include a strategic takeover premium…

Transaction overview

On August 3, 2010 it was announced that Gameforge has acquired 60% of the outstanding shares of its competitor Fogster AG. The remaining shareholders are offered a price of €25 in a mandatory takeover offer that runs until September 20. Funnily enough, Gameforge also announced that it already owned  23.2% of Frogster prior to this transaction. According to the Hauck & Aufhäuser broker report that can be found on the Frogster website, this share ownership had not been published earlier. This is actually very strange…  

Deal metrics

So, what does a share price of €25 mean to the valuation of Frogster AG? It values the company at an enterprise value of €70 MM implying the following transaction multiples:

Based on 2010 estimated financials:

• EV/ Sales: 2.7x
• EV/EBITDA: 10.1x
• EV/EBIT: 11.0x
• P/E: 17.0x

Based on 2011 estimated financials:

• EV/ Sales: 1.5x
• EV/EBITDA: 5.8x
• EV/EBIT: 6.0x
• P/E: 9.9x

You can download the detailed analysis at a share price of €25.00 here.

What should Frogster investors do?

The two most up-to-date broker reports published on the Frogster AG website have price target of €36 and €39, respectively. This yields a consensus/ average of €37.50 which is exactly 50% above the takeover offer by Gameforge. Of course, given these expectations, the equity analysts advise investors not to accept the Gameforge offer. A valuation of €37.50 would equal 2010 estimated multiples of 4.1x EV/Sales and 15.6x EV/EBITDA and 2011 estimated multiples of 2.3x EV/Sales 9.0x EV/EBITDA . If you browse the internet a bit, you will find out that in April this year, Zynga, the social games company, was rumoured to have a valuation of US$5 bn while generating approx. US$525 MM Sales and US$170 MM EBITDA in 2010 (implied multiples of approx. 10x Sales 10E and 30x EBITDA 10E).

You can download the detailed analysis at a share price of €37.50 here.

Strategic rationale

Gameforge is a direct competitor of Frogster pursuing the same business model of developing and distributing client- and browser-based MMOGs. Gameforge would for sure benefit from the acquisition of Frogster’s blockbuster Runes of Magic as well as the recently acquired titles Mythos and Tera. However, there could be something else about this acquisition that has nothing to do with adding titles to Gameforge’s large game portfolio. The key question is: why should Gameforge bother aquiring a publicly listed company including the hassles of a mandatory takeover offer and maybe later on a minority squeeze-out while there are many private companies in the market that Gameforge could easily be buying?

Lets go reverse-merger…

Gameforge is a company that can finance its growth out of its cash flow and such an acquisition out of bank debt if needed. That means the company is in no need of external funding. Also, its main shareholders do not seem too eager to exit their company and if so, the price would be pretty high. So in summary, Gameforge is neither an IPO case (no need for external funding) nor a very likely exit candidate (potentially too expensive). However, in 2007 investor Accel Partners acquired a minority stake in Gameforge. What does a financial investor do if stuck in a company? Right, looking for alternative routes to exit! And here we go: if the takeover offer succeeds and enough Frogster shareholders sell their shares all Gameforge needs to do is merge Gameforge AG into Frogster AG. Existing Frogster shareholders will be heaviliy diluted so the Gameforge shareholder structure will not change a lot, however, all the sudden people at Gameforge have a listed entity without a painful IPO process that is not required anyway as the company does not need any money. Halleluja, Accel can sell shares whenever they want, Gameforge can acquire companies with shares, Employees will know what their stock is worth and if needed, Gameforge can raise money. And all that without the pain and risks of an IPO process…

Disclaimer

I just want to be straight-forward that Gameforge is a competitor of WWG worldwidegames GmbH. WWG operates the browser game platform playnik.com and was co-founded by me in 2008 to  become the first independent publisher of browser based MMO games.