SCi Entertainment: Ready to Play

Profits have been sharply curtailed by expansion and product delays as the game maker holds back new titles for a dominant console player to emerge, but SCi's still got its game on

The video games business isn't for the faint of heart. No one knows that better than SCi Entertainment Group, the maker of popular titles such as the Lara Croft and Hitman series. After seeing its stock price hit a record high in January, 2006, the London-based software publisher is now under pressure as sluggish games sales in 2007 and a wait-and-see approach to new consoles from Sony, Microsoft, and Nintendo have caused its share price to slump 41% over the last 18 months.

In part, SCi Entertainment (SEG.L) is a victim of its own success. Since buying rival British gaming company Eidos for $145 million in May, 2005, the firm has streamlined its development process, expanded its tie-ins with Hollywood movie studios, and invested almost $200 million in new games.

Waiting for the Console Wars to End

These long-term strategic moves, however, still haven't fully trickled down to the company's financial results. Though SCi Entertainment added lots of jobs from 2003 to 2006, earning it the No. 13 position on this year's European Hot Growth report, it posted a $56 million loss for the year ended July 2007 on revenues that slipped 20% year-over-year, to $288 million.

"You have to put the figures into perspective because the average development cycle for new games is around two years," says Richard Newboult, analyst at London-based brokerage Panmure Gordon (PMR.L). "In general, SCi has done an excellent job at bringing good games to market."

SCi Entertainment also has postponed any major new product offerings until the battle for console dominance has played itself out. It's too early to tell which of the three major manufacturers will take the top spot, although the surprise success of the Nintendo (7974.T) Wii over the Sony (SNE) PlayStation 3 and Microsoft (MSFT) Xbox 360 shows there's everything to play for.

While this wait-and-see approach has hit the company's bottom line, industry analysts reckon it's the safe bet for a business that lacks the deep pockets of rivals Electronic Arts (ERTS) and Ubisoft (UBIP.PA). It takes sales of roughly 400,000 units before a game breaks even, so backing the wrong console could be a fatal move for a company that is still so dependent on its Lara Croft and Hitman franchises.

Possible Partnerships

One solution could be a tie-in with a larger player. SCi Entertainment's board confirmed in September that it had received an approach, although France's Ubisoft has already ruled itself out. Another possible suitor could be Time Warner Entertainment (TWX), which already owns 10.25% of the company and has contracted the British firm to produce games for the likes of Batman and Looney Tunes.

No deal has yet been announced, but SCi Entertainment's continued sluggish stock price makes it a prime target for buyers looking to cash in on the company's high-profile games portfolio.

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