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Will artificial intelligence give you the chance to develop video games quickly and cheaply in the longer term? EQT will not be convinced. The Swedish private equity group has struck a deal to purchase Dublin-based Keywords Studios, valuing the Aim-listed company at £2 billion. The video game service provider's shares are under pressure as a result of the threat posed by AI. The 67 percent premium offered by EQT suggests that the corporate believes the potential of AI is exaggerated.
In fact, EQT is well priced. Even the very best price discussed in May of £25.50 per share was well below Keywords' peak price in 2021. The final offer got here in lower, at £24.50. This reflected a downgrade of the corporate's prospects: it said organic growth in the primary half of the 12 months had been negative. It also reflected that one among the UK market's last remaining gaming stocks, Aim, was strategically finished.
The decline in keywords has less to do with AI than with game makers pushing their development budgets into the longer term. Last 12 months was particularly tough: the US writers' strike put major productions on hold and organic growth slowed to only 6 percent. By the time EQT arrived on the scene in May, shares had fallen 60 percent from their 2021 peak.
The problem was that Keywords had relied on its high valuation to proceed a roll-up strategy. Since 2013, the corporate had bought greater than 60 additional businesses. Trying to consolidate the sector was much easier when its shares were trading at 40 times expected 2021 earnings, greater than 100% greater than the remaining of the sector.
Before the offer, that valuation had fallen to only 10 times. This is partly as a result of the broader problems within the UK small-cap Aim market, which is mostly trading at a record discount. EQT's offer, which targets 22 times 2025 earnings, continues to be below the typical for the reason that company listed in 2013.
Shareholders are unlikely to complain. Without a solid valuation, Keywords' strategy seems doomed to failure. There continues to be loads to realize: Keywords is the biggest company offering services to video game publishers, but its current market share is estimated at just 6 percent worldwide.
Given the cold shoulder from the stock market, private ownership appears to be the easiest way forward. Additional capital from EQT should get the roll-up strategy moving faster. And if AI is to alter gaming outsourcing, Keywords can have the financial strength to steer, not only follow.
