King IPO Discount Shows One-Hit Wonder Worry for ‘Candy Crush’

Photographer: Andrew Harrer/Bloomberg

The King Digital Entertainment logo and Candy Crush Saga game. Close

The King Digital Entertainment logo and Candy Crush Saga game.

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Photographer: Andrew Harrer/Bloomberg

The King Digital Entertainment logo and Candy Crush Saga game.

Call it the one-hit wonder discount.

King Digital Entertainment Plc (KING), the maker of the “Candy Crush” smartphone game that’s trying to raise $533 million in an initial public offering today, is seeking a price-to-sales valuation cheaper than most of its publicly traded peers.

At the top of the price range, King would be valued at $7.6 billion, or about 2.9 times projected sales this year, according to a 2014 revenue estimate by Sterne Agee & Leach Inc. By that measure, it’s about half the price of Chinese game developer Giant Interactive Group Inc., at 6.3, and 43 percent cheaper than Zynga Inc. (ZNGA)’s 5.1 times 2014 sales.

Still, with King dependent on “Candy Crush,” for 78 percent of sales, the valuation may not be low enough, said Tony Wible, an analyst at Janney Montgomery Scott LLC. While Dublin-based King has introduced four additional products to diversify its revenue, few companies in the mobile space have been able to follow up on a hit game, he said.

“We can go through a long list of one-hit wonders, everything from ‘Angry Birds’ to ‘FarmVille,’” Wible said by phone from Philadelphia. “In this whole space, you should put a hefty risk discount into the valuations.”

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Activision Blizzard Inc., the largest U.S. video-game publisher, trades at 3.2 times sales. At the top of its price range, King would be valued higher than Electronic Arts Inc. (EA), which trades at 2.3 times 2014 sales based on yesterday’s closing price. That company’s shares have been under pressure as it shifts from retail to digitally delivered titles.

King and stockholders Apax Partners LLP and Index Ventures are selling 22.2 million shares for $21 to $24 each, according to a regulatory filing. A spokeswoman for King declined to comment on the company’s proposed valuation.

Game Content

The company will post $2.62 billion in revenue this year, according to a projection by Arvind Bhatia, an analyst at Sterne Agee, who initiated coverage on March 20. While that would reflect a 39 percent increase from 2013, it’s slower than the 1,000 percent annual jump from 2012, the prospectus shows. King generates revenue when users purchase virtual items, such as extra lives or additional game content, for about $1 apiece.

King is known for its “Candy Crush” puzzle game featuring different colored candies that has 97 million daily active users. It also provides games such as “Farm Heroes Saga,” “PetRescue Saga,” “Papa Pear Saga” and “Bubble Witch Saga,” which each have fewer than 20 million daily active users, the prospectus shows.

Zynga Lessons

King’s discount may reflect lessons investors learned following Zynga’s debut. The maker of “FarmVille” went public in December 2011, dropped 5 percent in its debut and slumped almost 80 percent in the subsequent year. Zynga’s revenue, like King’s, was concentrated in one major source at the time of its IPO: more than 90 percent of its sales came from Facebook Inc. Shares continued to slide as Zynga’s users started defecting to “Candy Crush.”

“King’s current reign feels somewhat similar to the early days of Zynga, when multiple ‘Ville’ games were topping the charts, except now the game series is called ‘Saga,” Bhatia said in his latest note.

The company’s overall growth has slowed since “Candy Crush” peaked in July 2013, he said.

‘Nimble’ Position

Despite slowing growth and a reliance on “Candy Crush,” James Gellert, the chief executive officer of Rapid Ratings Inc., says King’s financial fundamentals are strong.

“The market is focusing on whether ‘Candy Crush’ can be replicated and the fact that they’ve had declining revenue over the past few quarters,” Gellert, whose New York-based firm uses quantitative models to grade securities, said by phone. “The company is really quite solid and is run in an efficient way that makes it well-positioned to be nimble.”

Unlike Zynga, which hasn’t posted an annual profit since it went public, King’s after-tax profit margins were 30 percent last year, its prospectus shows.

The company shares are expected to start trading tomorrow, listed on the New York Stock Exchange under the symbol KING. JPMorgan Chase & Co., Credit Suisse Group AG and Bank of America Corp. are managing the offering.

To contact the reporters on this story: Leslie Picker in New York at lpicker2@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net Elizabeth Wollman, Rob Golum

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