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Eidos acquired by Square Enix
Square Enix this morning launched a recommended all-cash offer for Eidos, the beleagured British games publisher.
The offer is priced at 32 pence a share, valuing Eidos at £84 million. This represents a premium of 129% over yesterday’s closing share price and a premium of 258% over the price on 14th January, the day before Eidos announced that it was in preliminary bid talks. But from late 2005 to mid-2007, Eidos (or SCi as the listed entity was then known) traded at over 300p a share, peaking at 420p on 3rd January.
So in that context, shareholders have seen the value of their equity fall by approximtely 90% from its value 18 months ago.
Nevertheless, this looks like a sensible deal.
Square Enix strengthens its presence in Europe and the US and acquires strong brands such as Tomb Raider, Hitman and Championship Manager. Eidos, which has consistently missed financial forecasts and disappointed the City, finds a new home that can help finance the its release schedule (particularly important since the disappointing sales of Tomb Raider: Underworld meant that Eidos breached its banking covenants with Lloyds TSB and may not have been able to renegotiate its £25 million overdraft, which would have made launching new product for Christmas 2009 very challenging.)
The transaction will take place via a Scheme of Arrangement, which requires a majority of only 75% of the shareholders to approve the deal at an EGM expected to be held in March. Two major institutions (Insight Investment Management and Cazenove Capital Management) have provided irrevocable undertakings to vote in favour of the Scheme, and they control 13% between them. According to Reuters, the irrevocables lapse if a third party tops Square Enix’s offer by at least 15 percent (or approximately 37p a share).
Eidos also stated in its announcement that “Warner Bros Entertainment Inc. is contractually obliged under a Subscription Agreement with Eidos to provide an irrevocable undertaking in respect of 52,518,080 Eidos Shares representing approximately 20 per cent. of the existing issued share capital of Eidos”. This undertaking will lapse if a third party or Warner Bros itself makes a bid for Eidos at a higher price than the Square Enix offer.
The deal doesn’t provide any particularly useful valuation metrics. In its last financial year (ended June 2008), Eidos generated revenue of £116 million and losses of £136 million. It is forecasting revenue of £160-£180 million for the current financial year. So the valuation is somewhere around 0.5x revenues. But Eidos is in a strategic and financial hole, meaning that these metrics are not that meaningful for comparative valuation.
The shares are currently trading at 31.5p, a fraction below the offer price. If it trades up, that may indicate that the market anticipates a counterbid. My feeling is that Warner has had plenty of time to bid, and is unlikely to make a counter-offer. But given that it spent £45 million for 10% of Eidos in December 2006 and a further £15 million for another 10% in April 2008, Warner may feel that for only another £75 million or so, it’s worth doubling up and buying the whole thing.
Either way, Eidos’s position as the poster child of British gaming is over.
UPDATE 16th February 2009: Warner has given Square Enix an irrevocable undertaking to vote in favour of the acquisition. Square Enix now has irrevocables over approximately 33% of the shares of Eidos. Warner’s undertaking lapses if Square Enix doesn’t follow through on the takeover process, if Warner itself decides to make an offer for Eidos or if a third party makes a higher offer that is recommended by management.