Hats off to Ubisoft Entertainment SA. The video-games firm has won its first boss fight against Vincent Bollore, the billionaire chairman of Vivendi SA, who has effectively hit the pause button on a potential hostile takeover bid. All credit should go to Ubisoft's family backers, who have outperformed in a tough console gaming market. But the takeover game isn't over. The company faces an uphill climb to hold onto its premium valuation.
Ubisoft has weapons to resist Vivendi's stated ambitions to own a big player in the gaming world. One is its price tag. It is very expensive to buy, even for a firm chaired by a billionaire. Vivendi's announcement that it will not launch a takeover bid in the next six months has done little to change that. Ubisoft's shares fell 1.4 percent Friday, giving the company a market value of 7.6 billion euros ($9 billion). Buying out the rest of the company would cost Bollore the best part of 6 billion euros. That would swell Vivendi's debt pile and threaten its credit rating, according to Morgan Stanley, so it was always going to be a long shot at current price levels.
But Ubisoft's valuation is vulnerable to a reset. It trades at a forward price-to-earnings multiple of 31.1, ahead of its major peers. The stock has basically doubled year-to-date. As much as 15 percent of its premium is due to takeover speculation, according to Kepler analysts, which Bollore can deflate by selling down some of Vivendi's stake to monetize an impressive 1 billion-euro capital gain. Some is also due to share buybacks, but they're of temporary value. What's left is a more fundamental question: The company's ability to keep outperforming in a tough market that's in constant flux.
Recent results have been impressive. The founding Guillemot family this year proved it can breathe new life into creaky franchises like "Assassin's Creed" and "Rayman." The former got a much-needed reboot set in Ancient Egypt, while the latter's cutesy Rabbids were paired with Mario for a Nintendo Switch console exclusive. First-half revenues soared 66 percent, powered by digital sales and the ability to squeeze more cash and lifespan out of big-budget titles by selling in-game extras.
Still, this remains a tough market. While recurring digital revenue helps reduce earnings volatility, it doesn't entirely remove it either -- games, like music, can produce both big hits and big flops. Rising development costs in the AAA gaming world can make it difficult to experiment cheaply, according to IHS Markit analyst Steve Bailey. Console and PC gamers have begun to bristle against excessive micro-transactions and "pay-to-win" features for games that already cost $60. Ubisoft has been spared their ire so far, but customer opinions can change.
So while Ubisoft's ability to create value is there, its valuation doesn't reflect the risk profile, reckons Roche-Brune fund manager Gregoire Laverne. A cool-down is likely.
As for Bollore, he has given himself some time to wait this one out. There's no evidence to suggest Vivendi will easily give up on its Ubisoft ambitions. Selling a near-30 percent stake wouldn't be straightforward, and there might also be the worry of a missed opportunity if it gives up too quickly. The last time Vivendi exited a video-games company was in 2013, when it announced the sale of most of its stake in Activision Blizzard; the stock has almost quadrupled since.
Ubisoft must pull off some pretty special moves, and avoid any missteps, to avoid a second-round fight with a powered-up Bollore.
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