SPACInsider contributor Eric Weidemann this week compiled his three favorite potential SPAC targets in mobile gaming. We look at why they are compelling and why each could be a fit for a blank-check merger.
Mobile gaming isn’t sneaking up on anyone as a future growth sector.
Expected to grow at a CAGR of 14% through 2025 and 8-10% year-on-year through that period, mobile games are sure to lead to a flock of new public companies over that span of time. Mobile now makes up about 45% of the total gaming market, but this was not always seen as an inevitability.
Venture capital firms had long been leery of investing in independent gaming shops, which frequently saw revenues highly dependent on single hit games. But, with smartphones absorbing ever more of the entertainment pie, private money is now clearly following.
Investment in the video game sector overall soared 77% in 2020 to a record $13.2 billion. The sector now has plenty of mature targets as well with 10 gaming companies IPO’ing last year.
As such, SPACs don’t necessarily represent a lifeline of funding to a malnourished sector, but they could present a more lucrative financial path to game-makers. Already this year, two mobile gaming companies have IPO’d only to find themselves trading well below their opening price.
Two weeks ago, AppLovin (NASDAQ:APP) broke price immediately and finished its first day at $62.50, down 18.5%. It has since slid further to a $58.75 close Thursday. Playtika (NASDAQ:PLTK) fared better initially in its January IPO, but still wound up closing Thursday down 13.8% from its $33.40 opening price.
SPAC targets tend to have a built-in value floor to their deals with the SPAC’s own IPO price. This is not guaranteed, of course, and Kismet One (NASDAQ:KSMT) closed yesterday at $9.98 having announced a combination with mobile game developer Nexters in February. While this poses some redemption risks as the parties approach the de-SPAC endgame, being down just .02% from the negotiated valuation is still a far better result from a target’s perspective.
During this same time, online game-maker and game-design platform Roblox (NYSE:RBLX) pulled of a direct listing in March and has zoomed up 17% from its first trade at $64.50. While this is certainly a good result and a feather in the cap of direct-listings, online gaming company Skillz (NYSE:SKLZ) closed up 27% when it was similarly 50 days out from its announced deal with Flying Eagle.
Having since completed the de-SPAC, Skillz closed yesterday at $18.61. This was down from its post-announcement peak of $43.72, but still represents a perfectly fine 86% gain about six months out from the announcement. Additionally, many SPACs include an earn-out in their transaction structure, allowing company management to capture additional upside in the share price if the deal is well received. You can’t do that in an IPO.
Scopely accounted for a hefty chunk of the 2020 investment into the gaming space with the $340 million Series E it raised in October at a $3.3 billion valuation. This round included late-stage technology investors that tend to invest in pre-IPO rounds like Battery Ventures, Greycroft and Revolution Growth.
At least some of that haul is likely to be used on further M&A ahead of a move to the public markets. It announced the acquisition of 150-employee game studio Genjoy at the same time and had previously bought up studios PierPlay, FoxNext, Cold Iron, and Digit Game Studios.
With FoxNext, Scopely pulled off a particularly impressive feat, taking a company that had been passed between Fox and Disney just a year earlier and seeing it complete its signature project the Marvel Strike Force Game. That game made $300 million in 2020 with 70% of its users playing seven-days in a row for an average of two hours per day.
That is impressive commitment from notoriously fickle mobile gamers and Scopely pulls in similar levels of engagement with Star Trek Fleet Command. Scrabble GO, meanwhile, which it acquired through PierPlay, was among 2020’s most downloaded games.
Given that Scopely has raised nearly $1 billion in outside funding since its 2011 founding, it would likely take a team that could wow its management with solid expertise and synergies. This could be where one of the Khosla SPACs come in. With $563.3 million raised in its IPO, Khosla III (KVSC) could bring a significant amount of new dry powder to Scopely and support a significant jump in valuation.
Khosla’s prestigious portfolio and track record in private investing would likely also bring some market momentum of its own and its lack of warrants avoids that future dilutive potential and near-turn uncertainties connected to the SEC’s recent comments.
Jam City has similarly built a vast mobile gaming platform with cornerstone pieces coming from third-party intellectual property.
But, while its portfolio is certainly lifted by games linked to the Harry Potter, Frozen and Family Guy universes, several of the jewels in its crown are internally developed. Its Cookie Jam game series has generated about $500 million over its lifetime while Panda Pop has been downloaded more than 140 million times.
Unlike Scopely, it is not sitting on a freshly raised war chest of private capital. Jam City last raised capital 27 months ago in January 2019 when it took in $145 million in a round led by Bank of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM).
Jam City has been even more acquisitive than Scopely, having bought up seven studios, at a rate of one per year 2015 through 2019. But, the company’s 2019 acquisition of Berlin-based 231 Play was its last such deal. As such, a SPAC deal could get it back in the hunt for inorganic growth opportunities.
A SPAC combination with a diversified purely games-focused developer would also be a bit of a novelty. Skillz has developed its own games, but is differentiated in that it generates its revenue primarily on the take from hosting player tournaments. PLAYSTUDIOS, which announced a combination with Acies (NASDAQ:ACAC) in February, is set up primarily to serve major consumer brands with games that award users loyalty perks and experiences for the brand.
Kismet One’s target Nexters, meanwhile, has its head squarely in the game, but the vast majority of its revenue comes via its flagship game Hero Wars. As such, Kismet One and Acies have not enjoyed the same reception that Flying Eagle got with Skillz.
But, a developer like Jam City with a variety of name brand games and a track record of generating successful original content could be an entirely different ball game with the potential to stir retail investors from their spring slumber.
Another such play could be available with Pocket Gems, with the added allure of a China entry strategy.
Fueled by a $150 million in investment by Tencent (HK:0700) through two rounds, San-Francisco-based Pocket Gems has been working to gain purchase in the Chinese market, which has overtaken the US in mobile app revenue. Pocket Gems had generated impressive traction stateside with its games Episode and War Dragons. These two titles had generated 300 million downloads and an estimated $200 million in sales by 2017.
Tencent owns an estimated 38% of Pocket Gems, and another company in its portfolio just struck a SPAC deal with Lilium Aviation’s announced combination with Qell (NASDAQ:QELL).
Pocket Gems appears to have avoided the stagnation that can come with a limited number of total releases by developing those games as open platforms for community content growth. Episode has partnered third-party companies to craft branded storylines, and has also opened up the workshop to individual users to create narratives in exchange for a cut of the revenue from in-game microtransactions.
To date, the game has hosted 150,000 unique storylines though Episode, racking up 9 billion views and 12 million users. In the fourth quarter of 2020, it ranked as the number one interactive story game by downloads. Sensor Tower meanwhile estimates that War Dragons generates about $2 million per month for Pocket Gems.