Apax crushes mobile gaming

At the end of February, Apax Partners said it planned to list some shares in King Digital Entertainment, owner of popular mobile game Candy Crush Saga, on the New York Stock Exchange.

The initial public offering of 22.2 million shares – which would take Apax’s stake down from 48.2 percent to 44.8 percent, according to documents filed with the US Securities and Exchange Commission – was expected at press time to value the business at $7.6 billion.

King makes online games that can be played via Facebook and various other mobile platforms. Its most popular games are Candy Crush Saga, which has 93 million daily active users, and Pet Rescue Saga which has 15 million daily active users, according to the filing. They’re free to play; King makes its money by selling virtual goods and hosting skill tournaments. And it clearly does that very well: its revenue grew from $22 million in the first quarter of 2012 to $602 million in the fourth quarter of 2013.

Apax, which declined to comment, initially invested in King in 2005 in a deal led by partner Roy Mackenzie, who has served on King’s board of directors since December 2006.

Assuming the IPO goes well, it could be a “King-maker” for the sector, says Phil Sanderson, managing director of IDG Ventures which makes early-stage investments in new media and consumer internet companies. “It will raise awareness of the industry. It will change people’s views and open their eyes to how attractive the market is.”

Mobile games were expected to generate $12.3 billion or 17.4 percent of all global game revenues in 2013 (including about $6.6 billion from social and casual mobile games), according to data from games industry research firm Newzoo. What’s more, this segment is expected to grow at a compound rate of 27.3 percent between 2012 and 2016 – nearly four times higher than the gaming industry as a whole.

Companies like King are also benefiting from greater mobile internet accessibility around the globe. Western European mobile gamers spent the most money online last year – an average of $4.40 per month – followed by North Americans ($3.87), according to Newzoo. But the highest number of paying mobile gamers can be found in the Asia-Pacific region – there are roughly 172 million, almost three times as many as in North America.

“It’s a fast-growing market and people can make a lot of money in it,” says Sanderson. “We are very active in this sector for that reason.”

There’s still nervousness in some quarters about how sustainable revenue from games like Candy Crush really is. But Sanderson argues that it’s a lot easier to come up with other games that are similar in structure, once a company has established a platform.

While mobile gaming companies are maturing, they haven’t done so to the same extent as traditional gaming companies. “We’re going to see strategic companies right-size their portfolios and decide they’re going to divest businesses that are no longer considered core,” says Kenneth Kirschner, a partner in Deloitte’s M&A transaction services group.

This may create opportunities for private equity, he says. “[The tech sector] is almost like its own little ecosystem, where companies look to acquire the next big thing or to fill a hole in the space. It makes more sense to buy the company than start it on your own.”

He notes that while private equity M&A activity was down generally in 2013 relative to 2012, deal volume was actually up in the tech sector.

“There is demand for innovation and the next big thing, regardless of macro trends. And the tech space isn’t necessarily correlated to the broader market.”