Why EA wants to buy this racing game maker for $ 1.2 billion
December 14, 2020, Electronic arts (NASDAQ: EA) announced plans to buy the UK games studio Codemasters (LSE: CDM) for $ 1.25 billion. EA’s offer is at a premium of 14% compared to the price Take-Two Interactive (NASDAQ: TTWO) offered in November. The deal isn’t finalized yet, but for now, it looks like EA is the frontrunner to acquire the studio. Here’s what investors need to know about the racing-focused games company.
What is Codemasters?
Codemasters is a 30-year-old British video game developer specializing in the racing genre. Dirt, GRID, Project cars, and Formula One are some of its best franchises. None of them are a domestic brand, and they don’t have the notoriety of something like a FIFA Where Call of Duty, but the titles are popular with racing fans of all types. For example, DiRT Rallye 2.0, the company’s rally car game, just reached 9 million users.
Since Codemasters is listed on the London Stock Exchange, we can look at its financial data to see what EA shareholders will get and at what price. Over the past 12 months, Codemasters has brought in around $ 151 million in revenue and generated $ 28 million in net revenue. He also had $ 74 million in free cash flow (FCF), which gave him a juicy 49% FCF margin. An FCF margin close to 50% is probably not sustainable in the long term, and historically Codemasters FCF margin has been closer to 40%, but it shows the quality of the business nonetheless.
At a proposed buyback price of $ 1.25 billion, EA would buy Codemasters at a price-to-sales (P / S) ratio of 8.3 and a FCF (market cap divided by FCF) multiple of 17. That’s a bit of a premium to EA’s 6.6 P / S ratio, but nothing of such concern that investors should think the company is overpaying for these assets. In fact, with buyouts like this, it is common for the acquiree to exit at a higher valuation.
Why EA wants to own it
In the press release that accompanied the takeover offer, EA said the combined companies will “create a world leader in racing entertainment.” EA owns Need of speed, one of the most popular racing games in the world, so the combined companies would have the majority of popular console / PC games in the genre.
EA also wants to add Codemasters games to EA Play, the company’s subscription service. At $ 4.99 per month or $ 29.99 per year, the service offers discounts, exclusive content, and unlimited access to a collection of EA games. If the Codemasters catalog is added to the service, EA Play’s value proposition will increase, which will hopefully get more users to subscribe. And if more people subscribe, that means more recurring revenue for EA.
Finally, EA may be buying Codemasters because they have, quite frankly, too much money. At the end of last quarter, EA had nearly $ 6 billion in cash on its balance sheet and generated nearly $ 2 billion in FCF in the past 12 months. Yes, that’s a good problem to have, and it can end up being a smarter decision just to buy back own shares, but acquiring another business at a reasonable price is a smarter allocation of capital than just leaving unused cash invested in government bonds.
Overall, while it won’t become a major part of EA’s business, acquiring these racing games makes the EA Play subscription service a better value proposition and consolidates EA as the premier studio in racing games. Investors in EA should be excited about its consolidation in the racing games market and happy that it looks like the acquisition is being done at a reasonable price.
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