After eating up lots of game studios Embracer Group set to close a bunch

Frankly, this kind of sounds like their buyouts were leveraged from the start, they were always going to have to eventually rip/cannibalize value out of the acquisitions to pay the debt, "Private Equity Raider" style, but the reckoning came home a bit earlier than expected.


Last edited by Purple Library Guy on 13 June 2023 at 4:18 pm UTC

Quoting: Eike

Quoting: dpanter'Huge hit' is a substantial understatement, more than 50% of their market value was destroyed in one fell swoop. Consequences arrive quickly when you're hurting.

I understand "partnership that has been negotiated for seven months will not materialize" as there hasn't been (much) actual money lost?

Yeah, but if they're retrenching this hard because of it, it suggests they were hard up before, I suspect deep in debt, and needed this "partnership" to keep on doing their thing. I never really understood what they thought they were doing, why it would be worth spending a whole lot of money to buy a bunch of smaller studios and put them under one umbrella but leave them basically separate; it's not like they were going to have a realistic shot at cornering the gaming market or something. I suppose in theory if you had a centralized marketing unit that marketed the games from all the studios then each of their sales could be higher and they'd be worth more? Whatever it was, presumably the rumoured "partner" that backed out thinks they were overoptimistic.

When I first heard of Embracer buying studios left and right I immediately thought that this will be the next Infogrames.

Quoting: Purple Library Guy

Quoting: Ehvis

Quoting: KlaasName change to Exterminator Group incoming?

That should be "Extinguisher Group" of course. Although I would have expected "Extender Group" before that. Maybe I've missed it.

Blast, beat me to it!

Bastard, always one step ahead!

Quoting: dpanter'Huge hit' is a substantial understatement, more than 50% of their market value was destroyed in one fell swoop. Consequences arrive quickly when you're hurting.

Quoting: SalvatosDo we know how that happened?

Yes, they been expanding, growing and banking hard on certain key strategic developments like the 2 billion USD deal that just fell through in the last second. They were literally about to sign the final contract when the unnamed other party just decided to bugger off. Their stock dropped something like 55% in a few days.

Quoting: EikeI understand "partnership that has been negotiated for seven months will not materialize" as there hasn't been (much) actual money lost?

This type of money doesn't exist at all anyway, but as you can see in the earnings report (linked in the article) they were doing pretty well before this, albeit in a seemingly unsustainable pattern. You simply cannot invest forever without making money back, and many of the studios etc they have been absorbing haven't been profitable.

When we talk about Embracer as potentially the only 'good guy' actor in this market, we are also keenly aware that money is always guiding for-profit entities at the end of the day. We cannot be naive to the point where we'd think that no acquisitions would ever be dismantled and shuttered, it's simply impossible.
Compared to the headhunting hitman assassinations some other companies I could mention have been doing for several decades, Embracer really does appear as a force for good. But it is still a for-profit, publicly traded company and they are not your friend.

Embracer will have rough times ahead, needing to cut yearly costs by 10%, 800 million SEK (~70 million €). Hopefully they will keep the Embracer Games Archive going, among other things.

Games Archive you say? Didn’t we find out that video game preservation is basically piracy? :P

Quoting: Eike

Quoting: dpanter'Huge hit' is a substantial understatement, more than 50% of their market value was destroyed in one fell swoop. Consequences arrive quickly when you're hurting.

I understand "partnership that has been negotiated for seven months will not materialize" as there hasn't been (much) actual money lost?

Perhaps not much money lost but the news that this huge deal had been cancelled made their stock drop AND they use not only cash but also their stock to buy new studios so when the stocks plummeted this means both that buying new studios will be more expensive (aka they have to pay double the number of stocks) AND it also means that they studios that they have already bought have seen the value of the stocks they got halve in value leading to sour grapes everywhere.

edit: the broken deal is also lost income of roughly USD 2bn so even if they didn't loose any money they lost a lot of projected income here.

Quoting: BalkanSpy"transform us from our current heavy-investment-mode to a highly cash-flow generative business this year"

Gotta love that corporate doublespeak. Which new gibberish will they invent next?

Not so sure exactly what it is here that you think sounds doublespeak? This just means that they have halted their expansion and will now concentrate on generating income instead.


Last edited by F.Ultra on 13 June 2023 at 6:53 pm UTC

Quoting: Purple Library GuyFrankly, this kind of sounds like their buyouts were leveraged from the start

Well yeah, that's how, was far as I know, almost every industry works... On credit.

When I worked in construction, our company owner would joke "The entire industry would freeze if any one actually tried to collect their bills!!"

Even small business do the same. A deli owner friend of mine remarked how he didn't turn a profit for his first 5 years and how that was the average for his industry/region. That's 5 years with everything on credit and even if he did make some profit, the debt is still there.

I'm some cases, paying off debts is considered a waste of money as you get higher yields investing that money vs the savings from paying early (or at all), especially in during our past decade where interest rates were low.

Of course, that can bite people and companies when expected investments fall apart, as it seems to have done here.

From their recent Q4 report:

"In Q2 2022/23 we outlined our ambition to close a
number of partnership and licensing deals that would
be jointly transformative for Embracer. We have already
entered into multiple partnerships and licensing agree-
ments with industry partners on both AAA games and
movies based on some of our iconic IPs. Except for
the already announced deals that have more limited
short-term financial value, we have been working on
one groundbreaking strategic partnership agreement
that would have set a new benchmark for the gaming
industry.

Negotiations have been taking far longer than originally
anticipated considering we had a verbal commitment
already in October 2022. The specific deal included
more than USD 2 billion in contracted development
revenue over a period of six years. The deal would have
enabled a catch-up payment at closing for already capi-
talized costs for a range of large-budget games, but also
notably improved medium-to-long-term profit and cash
flow predictability for the duration of the game develop-
ment projects.

The transaction had many of the highest rated global
advisories onboard with several hundred people
engaged on both sides. All documentation was finalized
and ready to go as of yesterday. We asked for the exe-
cution of the agreement before our Q4 announcement.
However late last night we received a negative outcome
from the counterparty. This decision was unexpected to
the management and the Board of Directors of Embracer.
Capitalizing on our collective value through our partner-
ship approach remains a key priority for the Group. We
will continue to seek partnerships and collaborations
with third parties across all our segments, including
opportunities within transmedia. The demand for content
has never been greater, and Embracer is well-positioned
to meet that demand. We still have ongoing discussions
about additional partnership and licensing deals, but the
impact of potential deals is not included in the manage-
ment forecast for the current financial year. That said, our
ambition is still to increase the share of externally funded
game development.

We have a solid pipeline of ongoing development proj-
ects, but multiple projects will need more time to live up
to our high expectations of quality and to reach their full
commercial potential. There have recently been several
changes in expected release dates moving forward for
unannounced titles in FY 2023/24. Consequently, several
games with the potential to generate more than SEK
1 billion in net sales are now slated for FY 2024/25. Due
to these delays and without the significant, transformative
partnership deal, we expect to generate SEK 7 billion to
SEK 9 billion (previously SEK 10.3 billion to SEK 13.6 billion)
in Adjusted EBIT with improving cash conversion for FY
2023/24 and a healthy growth outlook in the following
years.
"

Quoting: denyasis

Quoting: Purple Library GuyFrankly, this kind of sounds like their buyouts were leveraged from the start

Well yeah, that's how, was far as I know, almost every industry works... On credit.

Fairly true. I think there's a difference though. It's like a first-order, second-order thing.
I mean, if I start a restaurant, and get credit so I can do the things that will let me serve meals to people and have them give me money which I can hopefully use some of to pay the credit, that's somewhat risky, but there's a direct link from getting the credit to doing the productive activity. On a broader scale, given the rest of the economic setup, if people didn't do that stuff, economic activity wouldn't happen nearly as much. So first-order running on credit is useful (up to a point anyway).

If other people start restaurants and use debt to help finance their operations, and then I take out debt to buy some of those restaurants (along with the debt the restaurants already had), that means I'm stacking new debt on top of the old debt, but not adding any new productive activity. So how am I going to make money from this? Usually, I'll need to do shenanigans. At minimum, cut wages and food quality and stuff, stiffing the workers and the customers. Often, stuff like shift my debt to the restaurants, then make them take on even more debt to give me money, then let them die and leave the creditors holding the bag. Second-order running on credit is not nearly as useful as first-order, and usually downright malignant. This kind of story is very common in the United States, they're even pulling this stuff with hospitals.

It may be that the Embracer Group actually thought that they as the new owners would bring so much additional value to the table that their acquisitions would make enough extra money to make up for the extra debt. Indeed, it may be that the partner got cold feet upon finding out that looting was not the plan and deciding the Embracer Group were naive.