Interview: Game on for Tencent-backed Paradox in M&A and mobile

Paradox Interactive AB (publ)

29/06/2018 16:46

By Helena Soderpalm and Eric Auchard
    STOCKHOLM/LONDON, June 29 (Reuters) - Tencent-backed
 0700.HK  strategy and simulation games publisher Paradox
Interactive  PDXI.ST  expects more acquisitions and mobile
gaming to help it meet sky-high investor expectations.
    Shares in the maker of games such as Stellaris have risen
almost 500 percent since it listed two years ago, giving it a
market value of nearly 21 billion crowns ($2.3 billion).
    Paradox is part of a thriving cluster of gaming companies to
spring out of Sweden, including Microsoft-owned  MSFT.O 
Minecraft maker Mojang and Candy Crush maker King, which was
bought by Activision Blizzard  ATVL.O .
    Incoming chief executive Ebba Ljungerud, who takes over from
Paradox founder Fredrik Wester in August, told Reuters that game
developers, publishers and studios were all potential targets,
with the best growth opportunities in the sector in Asia and on
mobile.
    "Of course we are looking at them," she said, adding that
Paradox has a limited presence in both and that it was "digging
where it stands" in terms of existing markets, of which the
United States is the most important. 
    Ljungerud expects at least 10 percent of Paradox's sales to
be from mobile games by 2020, from next to nothing now. It has a
fanbase of more than 2 million who play one of its games each
month, and a registered user base in excess of 7 million.
    Paradox's console- and PC-based games, such as "Europa
Universalis" and "Cities: Skylines", often have an historical
setting and are played on a world map. 
    Tencent has a 5 percent stake in Paradox, one of a number of
bets made in recent years by the world's largest gaming company
by revenue and the biggest investor in other gaming firms, which
has shifted from taking big stakes in proven winners to
spreading its cash among early-stage game design firms.
    It holds majority or significant minority stakes in Clash of
Clans creator Supercell of Finland, Epic Games, the makers of
this year's biggest global hit, Fortnite, and eSports league
organiser Riot Games. 
    "Expectations are high, that is obvious," said Swedbank
portfolio manager Carl Armfelt, who has an 8.6 percent holding
in Paradox. "There's the high valuation both on existing
products and prospects they will make strategic deals."
    Paradox, whose revenues have quadrupled over four years to
814 million crowns in 2017, has bought U.S.-based White Wolf
Publishing, maker of the horror-themed World of Darkness game
franchise, Netherland-based Triumph Studios and Battletech-maker
Harebrained Schemes, another U.S. games studio.
    "Our cash is strong and we have a good valuation ... so
there is room (for acquisitions)," Ljungerud said.
    
    CHINA CARD?
    Paradox was founded in 2003 by Wester, who at the age of 15
began importing Nintendo games from Taiwan.
    Its competitors include Electronic Arts  EA.O  and
Assassin's Creed-maker Ubisoft  UBIP.PA , although Ljungerud
said its was competing for people's time rather than against
other companies' games.
    Paradox, in which Wester retains more than a third and
investment firm Spiltan holds a quarter, sees Tencent as an
important partner, even before any expansion into China.
    "It's a giant market but it's not crystal clear which of our
games will fit in Asia. That said, it's fantastic to have a
partner like Tencent that knows the market really well,
Ljungerud said.
    A Tencent spokesman declined to comment specifically on its
Paradox stake, but said: 
    "We have learned much from our investments in overseas
gaming companies about local user preferences."
    Western firms receiving Tencent's backing say it provides
valuable strategic advice to break into China, according to
Jefferies analyst Timothy O'Shea. Tencent has also shown a
willingness to raise its stakes in promising game makers as
other shareholders seek an exit.
    Investors and analysts said Wester is unlikely to sell, but
Spiltan could do so if it wants to diversify, analysts said.
    However, Spiltan CEO Per Hakan Borjesson said his firm is a
committed holder of Paradox, despite having sold off a tiny
portion of its shares after the company's latest results.  
    "We want to remain a main owner but we may consider selling
parts of our stake," he told Reuters. "As long as we own 50
percent together with Fredrik Wester we can keep control and
decide on the future." 

 (Reporting by Helena Soderpalm, additional reporting by Olof
Swahnberg, editing by Alexander Smith)
 ((helena.soderpalm@thomsonreuters.com; +46 8 700 10 15; Reuters
Messaging: helena.soderpalm.reuters.com@reuters.net))