Tencent May Join Forces For Ubisoft Bid

Key Takeaways:

• Ubisoft’s share price fell to a 10-year low in September due to poor sales and the delayed release of “Assassin’s Creed Shadows”
• Guillemot and Tencent, holding 20.5% and 9.2% of Ubisoft voting rights respectively, would be acting in concert for a potential buyout 

By Ken Lo

The game developer behind the action adventure “Assassin’s Creed” has lately found itself on the losing side of a battle for market confidence.

Ubisoft, a French company listed on the Paris bourse, scored a hit with its combative gameplay when the franchise launched but has more recently struggled with its business performance, suffering a 58% drop in its share price this year that slashed the firm’s market value to 1.3 billion euros ($141.6 million).

However, the beaten-down price could make the company an attractive takeover target, given Ubisoft’s credentials in the gaming industry. And two main shareholders are reported to be considering riding to the rescue with a joint buyout that could take the company private.

According to Bloomberg, the company’s founders, the Guillemot family, have been in talks with strategic partner and fellow Ubisoft shareholder Tencent Holdings Ltd. (OTC:TCEHY) about options including an acquisition. The report, quoting people with knowledge of the matter, said discussions were still at a preliminary stage. As of the end of April, Tencent held 9.2% of Ubisoft’s net voting rights while Guillemot held approximately 20.5%. Therefore, market regulators would regard the two parties as acting in concert for any buyout bid.

Ubisoft did not directly comment on the report and the resulting market excitement, but issued a statement saying it “regularly reviews all its strategic options in the interest of its stakeholders” and would inform the market of any developments if and when appropriate. Tencent has so far stayed silent on the speculation.

Seeking A Savior

In the face of a plummeting Ubisoft share price, minority shareholders including AJ Investments and Blackstone Inc. had been putting pressure on Guillemot to explore a privatization or a sale to a strategic investor. Analysts say Tencent and Guillemot are probably keen to shield Ubisoft from any outside bid, wanting to retain the current management structure.

The Covid pandemic disrupted Ubisoft’s game production, with knock-on effects on the business.  New titles were delayed or cancelled, and underwhelming sales of its “Star Wars Outlaws” game triggered a downturn in the share price.

Last month Ubisoft delivered another blow to investor confidence, confirming that the launch of its highly anticipated “Assassin’s Creed Shadows” would be delayed until February 2025. The share price sank rapidly to a decade low of 9.89 euros as brokerages lowered their outlooks for the stock. But when the potential Tencent-Guillemot alliance came to light, Ubisoft’s share price rallied to a stable level at 13.06 euros.

A purchase of Ubisoft – valued at just over 10 billion yuan – would hardly be a stretch for China’s biggest gaming company. Tencent’s half-year earnings revealed that the tech giant had net cash of 71.76 billion yuan and total cash of 415.2 billion yuan in hand as of the end of June. The company generated free cash flow of 92.3 billion yuan in the first half of 2024, as its video and game businesses rebounded from a slump last year.

Over the past decade, the industry has shifted its focus from desktop games to mobile networks and cloud gaming.  With its deep pockets, Tencent has been able to evolve with the market, building a user base of nearly 1.4 billion for WeChat and Weixin and launching some of the world’s most profitable games, such as “Honor of Kings” and “PUBG Mobile”. The mobile and multiplayer products, with innovative and high-quality gameplay, have generated strong returns for Tencent.

Tencent’s Gaming Strategy

Despite its commercial success, Tencent has not shown much interest in developing blockbuster games that involve the highest production values and costs, known in the industry as AAA games. Developers of China’s first ultra-AAA game, the super hit “Black Myth: Wukong”, originally worked on Tencent’s “Dou Zhan Shen” but core team members Feng Ji and Yang Qi broke away to start a new business in 2014 after disagreements with management. Their former boss, Tencent, still invested 5% in the business.

Tencent rarely acquires game developers that pursue this enhanced quality and has shown no sign of introducing a mobile version of “Black Myth: Wukong”. Aside from the technical challenge of applying a PC game to a multiplayer mobile platform, a potential clash of corporate cultures would also be a consideration for Tencent.

Since Tencent invested in Ubisoft in 2022 and forged strategic ties with Guillemot, the two parties have not explored any deeper cooperation on games. Therefore, even if Tencent joins Guillemot in defending Ubisoft, it would most likely remain a relatively passive investor, with limited impact on its share price.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.