REG - Devolver Digital - ACQUISITION OF SYSTEM ERA SOFTWORKS, INC

Devolver DigitalAnnouncement

01/11/2023 07:15

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RNS Number : 0079S  Devolver Digital, Inc.  01 November 2023

1st November 2023

The information contained within this announcement is deemed by the company to
constitute inside information stipulated under the Market Abuse Regulation
(EU) No. 596/2014 as it forms part of the domestic law of the United Kingdom
by virtue of the European Union (Withdrawal) Act 2018 (as amended) ("UK
MAR").  Upon the publication of this announcement via the Regulatory
Information Service, this inside information is now considered to be in the
public domain.

 

DEVOLVER DIGITAL, INC

 

("Devolver", the "Group" or the "Company")

 

ACQUISITION OF SYSTEM ERA SOFTWORKS, INC

Acquisition of System Era for initial consideration of US$22m (up to US$40m)

Successful team and excellent strategic and cultural fit

Adds Expandable Games* hit title Astroneer

 

Devolver Digital, Inc (AIM: DEVO), an award-winning digital publisher and
developer of indie video games, is pleased to announce that it has acquired
System Era Softworks, Inc ("System Era") (the "Acquisition" or "Transaction")
for a total consideration of up to US$40.0 million to be satisfied by a
combination of cash and shares ("Total Consideration"), of which US$22.0
million is due as initial consideration.

 

Established in 2014, System Era is an award-winning, multi-platform video game
developer based in Seattle, United States, currently employing 50 individuals.
System Era is the developer behind Astroneer, a highly successful,
space-exploration themed, multiplayer sandbox adventure game, of which it owns
100 per cent of the intellectual property. Astroneer is an Expandable Game*
title released in 2016, with a proven history of player retention and
engagement through regular content releases and updates. To-date Astroneer has
generated over $87 million of gross revenues and has been played by over 13
million people.

 

Acquisition Highlights

 

·      The acquisition represents a strategic opportunity for Devolver
to expand outside of its core strength of premium indie titles, leveraging
System Era's knowledge of Expandable Game style development, as well as its
live operations technology and existing IP.

·      Devolver will capitalise on System Era's development expertise in
creating quality, community-centred, long-life titles, which it has proven
through the success of its debut title Astroneer, a game that in 2022 achieved
its highest annual unit sales figures

·      The Acquisition adds Astroneer to the Group's current portfolio
of high-quality intellectual property, alongside future titles System Era
develops.

·      System Era's founding team comes from AAA backgrounds, having
held senior positions at Ubisoft and Microsoft, working on franchises such as
Halo, Assassin's Creed and Watch Dogs, and have instilled a strong team
culture that aligns with Devolver Digital.

·      Total consideration of up to US$40 million is to be satisfied by
US$22 million initial consideration, made up of US$20 million cash on closing
and US$2 million of shares and cash to be issued on the 12-month anniversary
of closing, as well as US$10 million deferred consideration, and up to US$8
million potential earn out, both payable in cash and shares. Further detail is
provided below.

·      Under Devolver's accounting policies, based on an estimated
restatement of System Era management's unaudited numbers, System Era generated
revenue of approximately US$7 million, and adjusted earnings before interest
tax depreciation and amortisation ("EBITDA") of approximately US$3.8 million,
in the preceding 12-months to 30 June 2023.

·      Under Devolver's accounting policies the Acquisition is expected
to contribute positively to EBITDA in the year ending 31 December 2024, being
the first full year of ownership.

 

Douglas Morin, Chief Executive Officer of Devolver Digital, said:

"The thing that excites me the most about System Era is the cultural and
strategic fit with Devolver.  This is a highly experienced, talented group of
developers who come with a proven hit, Astroneer, in its eighth year.  Their
know-how in Expandable Games development opens up a new player-base and
revenue stream for Devolver.  We are looking forward to bringing the fun to
new players in new, innovative ways - and above all welcoming the team to
Devolver in coming days and months."

 

Brendan Wilson, Chief Executive Officer of System Era, said:

"Devolver and System Era have been mutual admirers for a long time. We've
always seen Devolver's banner as a mark of quality, but they also represent an
approach to developing and publishing games that is unique in the industry.
Their developer-first orientation lets bold and unorthodox ideas thrive. We're
thrilled to be joining into a confederation of like-minded people where System
Era's games will get the support needed to reach global audiences, and our
developers will continue to work within the culture they love."

 

* Expandable Games refers to premium games that continue to engage the
community and bring in new players for years after release through enduring,
timeless game design and a regular cadence of content and feature updates with
optional in-game purchases.

 

Enquiries:

 

 Devolver                                                       ir@devolverdigital.com
 Harry Miller, Executive Chairman
 Douglas Morin, Chief Executive Officer
 Daniel Widdicombe, Chief Financial Officer

 Zeus Capital Limited (Nominated Adviser & Joint Broker)
 Nick Cowles, Jamie Peel, Alexander Craig (Investment Banking)  Tel: +44 (0)20 3829 5000
 Benjamin Robertson (Equity Capital Markets)

 FTI Consulting (Communications Adviser)                        devolver@fticonsulting.com
 Jamie Ricketts / Dwight Burden / Valerija Cymbal / Usama Ali   Tel: +44 (0)20 3727 1000

Fieldfisher LLP and Foley & Lardner LLP are acting as legal advisers to
Devolver on the transaction.

 

 

About Devolver - www.devolverdigital.com

 

Devolver is an award-winning video games publisher in the indie games space
with a balanced portfolio of third-party and own-IP. Devolver has an emphasis
on premium games and has published more than 100 titles, with more than 30
titles in the pipeline scheduled for release over the next few years. Devolver
has in-house studios developing first-party IP titles and a complementary
publishing brand. Devolver is registered in Wilmington, Delaware, USA.

 

FURTHER INFORMATION

 

Overview of System Era

 

System Era is a multi-platform game developer based in Seattle, USA. It was
established in 2014, by co-founders Adam Bromell, Brendan Wilson, Paul Pepera
and Jacob Liechty. The business currently has 50 employees.

 

System Era is well known as the developer behind Astroneer, a space
exploration themed, multiplayer, sandbox adventure game, of which it owns 100
per cent of the intellectual property. Astroneer was designed as an Expandable
Game title and has regular content releases, meaning that major updates are
periodically released. The game is currently available on Steam, PS4, Xbox
One, Nintendo Switch.  To date Astroneer has generated over US$87 million of
gross revenues and been played by over 13 million people. System Era has a
strong track record of developing innovative content, driven by a quality team
with significant experience in the live-operations space.

 

Rationale for the Acquisition

 

The Acquisition aligns with Devolver's wider corporate strategy of gradually
expanding into the Expandable Games market. This model typically refers to
games that generate revenues from periodic update releases and/or in-game
purchases. This allows games to be monetised post-release and aims to engage
consumers over a prolonged period. The Expandable Games model bridges the gap
between the risk of free-to-play games and the large acquisition cost of
non-GaaS premium titles. From a consumer perspective, the Expandable Games
model fills player demand for evolving game play, resulting in an increase in
player retention. As a result, the acquisition will provide Devolver with the
foundations to grow into an important market, gaining access to increasingly
prominent revenue streams.

 

Astroneer has continued to perform strongly, in 2022 experiencing its most
successful year, in terms of both units sold and revenue generated. The game
is entering its eighth successive year and is expected to positively
contribute to EBITDA going forwards. Devolver is confident that the team will
maintain the success of Astroneer and provide meaningful future contribution
to the Group through the release of future IP.

 

There are also potential opportunities for synergistic benefits from the
development of future GaaS-based game titles. System Era utilise a number of
internally built live-operations for services such as authentication, in-game
stores, and user inventories. These technologies can be leveraged across
future Devolver titles, providing potential cost savings as well as broadening
the types of games Devolver can build with internal or external developer
partners.

 

Along with the powerful technology already developed by System Era, Devolver
will gain crucial expertise developing, launching, and running live-operations
games, allowing the group to expand beyond its core offering of premium indie
titles. With System Era becoming part of the Devolver family, the team will be
able to leverage the Group's significant expertise in production, marketing
and publishing, amplifying the success of System Era's current and future
titles.

 

Additionally, System Era provides Devolver with a significant presence in
Washington, USA, enabling better access to talent and an ability to support
existing and potential new clients.

 

Terms of the Acquisition

 

Devolver has agreed to acquire 100 per cent of the issued share capital of
System Era, for an agreed enterprise value of up to US$40.0 million, subject
to customary working capital adjustments and the earnout provisions summarised
below.

 

The Initial Consideration is US$22.0 million on a cash-free/debt-free basis,
subject to typical adjustments for cash, debt and normalised working capital,
and will be satisfied by: (i) the payment of US$20.0 million cash at
Completion; and (ii) US$1.8 million to be satisfied by the issue of 5,750,650
 new Devolver Shares and the payment of US$0.2 million payable in cash, which
are due to be issued and paid following the expiration of a 12-month period
following Completion (the "Hold Back Period").

 

Further Contingent Consideration of US$10.0 million to be satisfied by an
aggregate of US$5.6 million in cash and US$4.4 million by way of Devolver
Shares, due on release of its next title.

 

The Company will pay further Earnout Consideration of up to US$8.0 million to
be satisfied annually (in a combination of cash and shares at Devolver's
discretion) following the acquisition, subject to the satisfaction of certain
periodic performance targets that are based on Astroneer's EBITDA contribution
in the financial years ending 31(st) December 2023 to 31(st) December 2027.

 

Total Consideration is on a cash free, debt free basis, subject to customary
working capital adjustments. Devolver shares and cash held back has been
agreed in order to meet any warranty claims during such period. All shares
issued as part of the Total Consideration will be subject to lock-up
arrangements, details of which are set out below.

 

Devolver will finance the Transaction through a mixture of shares and its own
cash. The number of Devolver Shares to be issued following the expiration of
the Hold Back Period has been calculated based upon the Volume Weighted
Average Price (VWAP) of the Exchange Shares as derived from the AIM Appendix
to the Daily Official List of the London Stock Exchange for the thirty
consecutive full trading days (converted each day into USD at the prevailing
spot exchange rate) ending on the third trading day prior to completion of the
Transaction.

 

Lock-up Arrangements

 

The new Devolver Shares used to satisfy the Initial Consideration will be
issued at the expiration of the Hold Back Period and are in any case subject
to a 12-month lock-in period from Completion and thereafter a 6-month orderly
market arrangement on standard UK market terms. New Devolver Shares issued to
satisfy any Earnout Consideration and the Contingent Consideration will be
subject to a 12-month lock-in from issue and a subsequent 6-month orderly
market arrangement, both also on standard UK market terms.

 

Financial information of System Era

 

System Era's year end is 31(st) December. Under Devolver's accounting
policies, based on an estimated restatement of management's unaudited numbers,
for the preceding 12-months ended 30(th) June 2023, System Era generated
approximately US$7 million of revenue and adjusted EBITDA of US$3.8 million.

 

Post acquisition System Era will adopt Devolver's group accounting policies,
including certain policies under IFRS15, IFRS16 and IAS38.

 

System Era has in place a bonus incentive scheme that will reward management
and employees for outperformance in relation to its next title.

 

 

Financial impact of the Acquisition

 

Under Devolver's accounting policies, the Acquisition is expected to
contribute positively to EBITDA in the year ending 31 December 2024, being the
first full year of ownership. System Era continues to reinvest profits from
Astroneer into development of its future title.

 

 

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