in Mobile Gaming

PopCap: Takeover by EA imminent?

I have been away for a couple of days celebrating the Swedish “Midsommar” so please excuse that I am taking up a piece of news from last Thursday.

A rather big deal is about to happen in the mobile gaming world which further emphasizes the rapid pace of consolidation and growth in this sector. Rumor has it that gaming giant Electronic Arts (EA) is in talks to acquire PopCap Games in a deal worth more than $1 billion. The TechCrunch blog cited unnamed sources as saying the two companies are in “late-stage” discussions over a deal; representatives for EA and PopCap could not be immediately reached for comment. If true, it would be EA’s largest acquisition to date, according to data from FactSet Research. PopCap is a maker of popular mobile and casual games such as “Plants vs. Zombies,” “Bejeweled” and “Peggle.” EA has made several acquisitions in this space over the past two years, including its purchase of social game maker Playfish in 2009 for around $400 million, as well as the acquisition of Chillingo late last year and Firemint, which makes the popular “Flight Control” game, in May. The other name that has been attached to the deal is Zynga, the undisputed rulers of the social and Facebook gaming sector. The purchase would sense for Zynga; it would give them a ready made way of entering the console, computer, and mobile markets outside of their games which tend to be tied to services such as Facebook.

With a $1 billion price tag the deal values PopCap at a EV/Sales multiple as high as 10x (with PopCap’s revenue estimated at about $100 – $150 million according to several sources). The valuation shows the growth potential that the industry leaders are seeing in this segment. My favourite stock pick, G5 Entertainment, currently trades at a EV/Sales multiple of closer to 3x (based on a rather conservatione sales forecast of SEK 45m for 2011) . I would not be surprised if sooner or later one of the bigger software companies will put a bid for G5 Entertainment if the low valuation continues to persist.

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