LONDON, May 24 (Reuters Breakingviews) – A communications failure is casting doubt on the credibility of video game giant Embracer (EMBRACb.ST). Shares of the $3 billion company, whose empire spans everything from shooters to board games, fell nearly 45% Wednesday morning after a mysterious “groundbreaking” partnership deal fell through.
It is difficult to speculate on the details of the “deal”. Game companies occasionally create games in partnership with media giants that control popular intellectual property, such as movie, television, or comic book characters, but lack the know-how to create video games. Conversely, a hot developer may sign a deal to produce exclusive content for a specific video game marketplace, such as the Epic Games Store. What is certain is that Embracer’s communications strategy raised shareholder hopes: It described the deal as “transformational” and said Wednesday that it expected it to include about $2 billion of contracted development revenue over six years. He initially expected all or part of the deal to close in his 2022-23 fiscal year; that was then pushed back to the first quarter of 2023-24; and finally the deal fell apart on Tuesday night.
Embracer’s latest earnings warning will also irritate shareholders. It said Wednesday that adjusted operating profit for the current fiscal year would likely be between 7 billion and 9 billion SEK ($650 million and $840 million), from 10.3 billion to 13.6 billion. Swedish krona above. That’s a blow to investors already facing a tough gaming market. Among them is Savvy Games, owned by Saudi Arabia’s Public Investment Fund, which bought a stake of about 8% for SEK 103 per share in June last year, up from a price of about SEK 23 on Wednesday for the morning. Factoring in the stock price decline, Embracer’s company is valued at about 3 times its expected EBITDA for the current fiscal year, using analyst forecasts compiled by Refinitiv, versus an average of about 18 times for its US peers Take-Two Interactive Software (TTWO.O) and Electronic Arts (EA.O). Communication failures and profit warnings will make closing that gap a tough level to beat. (By Oliver Taslic)
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(The author is a Reuters Breakingviews columnist. Opinions expressed are his own.)
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