What’s the Deal?

Codemasters, the petrolhead’s favourite video games developer, has been the subject of a bid from Take-Two Interactive.  Codemasters listed on the official list of the London Stock Exchange in 2019 and, after initially disappointing (at least in terms of share price performance), climbed from a low of 140p to today’s 470p, valuing the business at £690 million.  At today’s prices, the shares trade on a forward EV/EBITDA of 13.6x and forward EV/Revenue of 5.2x

Like many video games developers and publishers, Codemasters has been a net beneficiary of the restrictions placed on us by the coronavirus pandemic.  As the government forced pubs to call last orders, gamers sought solace in titles such as DiRT Rally and F1 2020.

games Industry m&a

The success of the category in 2020 has made it a favourite for dealmakers as well as gamers, with some impressive transactions being booked.  Jagex, a Cambridge-based developer, known for its multiplayer online game Runescape, was acquired by Chinese financial investor Macarthur Fortune for a reported $530 million.  Sumo Group, a listed peer of Codemasters, acquired Lake Street Labs, a full and co-development studio in Oregon, for nearly $100 million.  The deal gives Sumo an additional 134 staff with experience of working with gaming giants such as Electronic Arts, and a presence on the West Coast for expansion into the broader US market.  Coatsink Software, based in Sunderland, publishes its own titles and develops games for third parties.  It sold to Thunderful Group in Sweden for £65 million in October, netting founders Tom Beardsmore and Paul Crabb around £20 million each.  Serial acquirers Keywords were also involved in the action, picking up two small development studios – Maverick Media and Coconut Lizard – for £3.6 million and £2 million, respectively.

sector analysis and the £100m one to watch

With all this consolidation, you would be forgiven for thinking that the attractive independents have been snaffled and the newly-minted founders are gliding around the Caribbean on their yachts.  A quick search for privately-owned publishing houses proved that this was not the case.

Trading as Dovetail Games, RailSimulator is behind the eponymous train game that lets players master everything from the high-speed, long-distance TGV to suburban rattlers.  Dovetail followed up its rail franchise with Fishing Sim World, billed as “the most authentic fishing simulator ever made”.  Available for PC, Playstation 4 and Xbox One, Fishing Sim has tapped into the explosive global growth in angling.

The business last reported revenues of £18 million and EBITDA of just shy of £3 million.  Our signals suggest that revenues have moved above £20 million and that this year’s EBITDA could hit £4 million.  Using MarktoMarket’s deal comps for this industry, we reckon Dovetail is worth at least £100 million.  The company is owned by a number of private shareholders, including founders Paul Jackson, Tim Gatland and Charlie McMicking, and Alcuin Capital Partners, which has a minority position.  The company is well funded so has little need for fresh capital but its long cap table and legacy private shareholder base (all of whom are well beyond their 3 year EIS investment holding period) suggest there may be appetite for an IPO, partial exit or outright sale of the business.

Whichever way they go, our analysis of the pricing of the early funding rounds indicates that investors would receive an extraordinary return on their invested capital.

Certainly a business, and a sector, to watch.

Looking for more deal insights? Find our full list here.