Apax Poised to Score 10,000% Gain on ‘Candy Crush’ IPO

Buyout firm Apax Partners LLP stands to score a 10,000 percent gain on its 2005 investment in King Digital Entertainment Plc as the maker of smartphone game “Candy Crush Saga” prepares its initial public offering.

In one of its last venture capital deals before it abandoned that business, London-based Apax injected about $35 million into King, according to a person with knowledge of the deal, who asked not to be named because the terms are private. The games maker set terms last week for the IPO that would value it at as much as $7.6 billion. Apax’s stake could be worth $3.5 billion.

While Dublin-based King has developed more than 180 games in the past decade, “Candy Crush,” a puzzle game that features colored candies, fueled most of its growth. The potential windfall comes as venture capitalists are seeing their best returns since the late 1990s dot-com bubble. Twelve venture-backed companies went public in the U.S. last year with market capitalizations above $1 billion at the time of offering.

“Apax had the insight early enough to make the right investment. King has been a superstar in mobile,” said Michael Hickey, an analyst with Benchmark Co. “When you have a blockbuster game like ‘Candy Crush,’ you’re going to realize a pretty significant performance.”

Index Ventures, a Geneva-based venture-capital shop that invested $6 million alongside Apax in 2005, also would reap about a 10,000 percent paper profit. Todd Fogarty, an Apax spokesman at Kekst & Co., declined to comment on the gains or the IPO. Index Ventures spokeswoman Nadia Kelly didn’t respond to a phone message.

Buyout Focus

Founded in the late 1970s by Alan Patricof and Ronald Cohen, Apax made venture capital investments and then in 1993 moved into leveraged buyouts. Martin Halusa, who succeded Cohen as Chief Executive Officer, decided to stop investing in startup companies in 2007 and focus solely on buyouts after raising a record 11.2 billion euros ($15.6 billion) fund.

Propelled by an eleven-fold rise in King’s revenue last year to $1.9 billion, King announced the IPO in February. It plans to raise as much as $533 million by selling 22.2 million shares for $21 to $24 apiece and would trade on the New York Stock Exchange under the symbol KING.

Apax’s stake would be valued at about $3.5 billion at the top of the proposed price range and $3.2 billion at the middle. In addition, the firm has received $266 million in dividends. Apax is selling about 2 percent of its shares in the offering.

Price Range

King’s Chairman Melvyn Morris, 58, would see his stake have a market value of $820.5 million, at the middle of the price range. Shares held by Chief Executive Officer Riccardo Zacconi, 46, would be valued at $698.4 million. King paid Morris $67.3 million and Zacconi $57.3 million in dividends in 2013 and 2014. Both executives would sell 2 percent of their stock.

At the midpoint price King would be valued at 3.8 times last year’s sales and 8 times earnings before interest, taxes, depreciation and amortization, or Ebitda, a widely used measure of cash flow. Zynga Inc., a pioneer in social gaming whose “Farmville” game lost popularity as “Candy Crush” surged, trades at 5.3 times sales and 42 times Ebitda, according to data compiled by Bloomberg.

The lower valuation reflects doubts that King’s sales are sustainable, said Hickey. “Candy Crush” produced 78 percent of King’s $2 billion in gross bookings last year, a potentially crippling dependence.

“The fear is that ‘Candy Crush’ has probably topped out. There is no loyalty in mobile,” Hickey said. “The landscape is always vulnerable to upstarts with limited capital.”

Cash Engine

King needs to show investors it can diversify by creating new games around its hit product and finding other ways to grow. Even so, “Candy Crush” probably will remain a cash engine for King for years, he said. The risks are priced in, Hickey said.

Apax and Index Ventures are restricted from selling more shares until six months after King goes public. The IPO would reduce Apax’s ownership interest to between 44.8 and 44.2 percent, depending on whether underwriters exercise an over-allotment option.

Index Ventures also would sell about 2 percent of its shares, its stake dropping to between 7.7 and 7.8 percent from

8.3 percent. With offices in Geneva, London and San Francisco, Index Ventures manages about 2.9 billion euros.

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