INTERNET: Ourpalm Drives Game Consolidation
Bottom line: The new purchase of 3 smaller rivals by Ourpalm could position the company as a consolidator for China’s fragmented gaming sector, and could be followed by one or more similar purchases in the next year.
A newly announced deal will see online game operator Ourpalm (Shenzhen: 300315) combine with 3 smaller rivals in a relatively large deal that could lay the foundation for a major new player to drive much-needed consolidation in the space. The new company looks interesting for a number of reasons, including Ourpalm’s existing connection with leading movie maker Huayi Bros, which could become an important strategic partner for the company.
Ourpalm could also become a strong platform to absorb some of the smaller Hong Kong- and New York-listed gaming companies that have struggled for investor attention due to stalling profit and revenue growth caused by their lack of scale. Potential players for future tie-ups could include recently listed Hong Kong players like Linekong (HKEx: 8267) and Forgame (HKEx: 484), or New York-listed Sungy Mobile (Nasdaq: GOMO), whose shares have all languished since their IPOs.
According to the latest reports, Ourpalm will acquire 100 percent smaller rival BlingStorm, 80 percent of Beijing Tianma and 30 percent of Shanggame for a combined total of 4.3 billion yuan ($700 million). (English article; Chinese article) Ourpalm already owns 70 percent of Shanggame, meaning the latest acquisition will make it the 100 percent owner of the company.
It will pay about half of the deal price in cash, and half with its Shenzhen-listed shares. In addition, Ourpalm will issue about 1 billion yuan worth of new shares in a private placement to fund the acquisitions. Shares in Ourpalm rose by their daily 10 percent limit when trading resumed after a suspension pending the announcement. After the rise the company had a market value of about 24.8 billion yuan, or about $4 billion.
I’m not intimately familiar with any of the acquisition targets, but the deal does look like it should cement Ourpalm’s position as a player to watch in China’s ulta competitive online game market. The overheated state of competition has caused revenue and profit growth to stall at many mid-sized players, leading to a steady stream of privatizations announcements and de-listings by names like Giant Interactive, Shanda Games (Nasdaq: GAME) and Perfect World (Nasdaq: PWRD) over the last 2 years.
I’ve been waiting a long time now for a strong consolidator to emerge in this space, with the ability to challenge Tencent (HKEx: 700) and NetEase (Nasdaq: NTES), the 2 industry leaders and only players that are still posting reasonably strong growth. But such consolidation hasn’t happened yet, and I suspect that personalities of executives and other inside factors may be to blame.
All that said, Ourpalm looks like it could have the potential to succeed where others have failed, following announcement of this complex merger plan. One of the company’s big draws is its ties to Huayi Bros, which owns 22 percent of Ourpalm and is one of China’s most successful independent film producers. That relationship could give Ourpalm and its new acquisitions access to some of China’s hottest movies and TV shows, which could be developed into popular gaming titles for the domestic and international markets.
We’ll have to wait and see what Ourpalm does next, and I do suspect it will need at least the next 6 months to fully integrate these 3 new purchases. But if things go smoothly, perhaps the company could make a play for some of the recently listed players like Forgame, Sungy or Linekong, all of which are valued in the $150-$450 million range and would be easily digestible by Ourpalm. We could even see a larger merger that would combine the company with a player like Perfect World.
Of course, I’ve been predicting such consolidation for a while and it has yet to happen. Instead, all of these smaller companies seem to keep muddling along, either as neglected public companies or privatized ones that also don’t seem very interesting. Perhaps some of these companies’ shareholders are finally waking up to the reality that they won’t survive for too long in their current state. That could play to the advantage of Ourpalm and other potential consolidators, perhaps creating an interesting new company with the potential to finally challenge Tencent and NetEase.
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