in Mobile Gaming

#G5 Entertainment: Getting ready for Nasdaq OMX

G5 Entertainment has taken the next step in the process to prepare for its upcoming relisting at Nasdaq OMX. The company completed a directed share issue of 800,000 shares, corresponding to 10%  of the number of shares outstanding before the directed share issue. The proceeds will be around SEK 37.6m before deductions for issue expenses. According to G5, there was a strong interest for the transaction and the directed share issue was oversubscribed. The directed share issue was primarily directed towards institutional investors in the Nordic region and the subscription price was SEK 47 per share, corresponding to a discount of 2% to the closing price on January 29, 2013. G5 Entertainment intends to use the proceeds to capitalize on “a positive outlook of the mobile gaming app market and continue its strong historical growth, by increasing the number of external and internal development projects and focusing more on high-quality free-to-play games.”

In a related move, companies associated with G5 founders have sold a total of 450,000 shares in order to further increase the free float of the company’s shares prior to a listing on Nasdaq OMX Stockholm. As a result, these major shareholders have reduced their aggregated holdings in G5 from 23.4% to 18.2% of the total outstanding shares after the directed share issue. They do re-iterate their long-term commitment to the company in today’s press release and apparently have the ambition to remain long-term investors in G5. They have entered into a lock-up agreement with Carnegie Investment Bank not to sell any further shares in the company for a period of at least 9 months.

Nordic Investor reached out to Vlad Suglobov, CEO of G5 Entertainment:

NI: We were somewhat surprised to see you taking in new money at this stage. What has caused you to do the directed share issue?:
Vlad Suglobov (VS): As we communicated previously, we were in the process of evaluating our capital structure. While our pipeline and release schedule is set for 2013 and should provide growth we aim for, we are looking further into the future. The proceeds will go towards projects to be released in 2014 and 2015. We compete with much larger companies with substantial resources, and we have to make sure we have resources in place to be competitive. It’s a tradeoff between organic growth which the company can deliver, and an opportunity for faster growth we can achieve by scaling our F2P portfolio in the same way we scaled our unlockable games portfolio. If you think of the potential of a single F2P game like Virtual City – which has in one year made more money than any other game we published to date, the upside we are aiming at is clear.

NI: Are you intending to recruit more people?
VS: The majority of hires in G5 in 2011-2012 came from increasing our marketing and customer support departments. We were ramping up the capacity in order to achieve the output of 1 game a week on each platform we support. We now have the team in place and we can handle such pace of releases. We do not plan on releasing more games than that and accordingly we do not have plans to continue hiring as much as before. We would of course like to build up our internal development capacity, but it can’t be done as fast as training people to create outstanding games is a slow process. Our plan is to rely more on outsourcing, having more games where we would define the vision and oversee the development, but the game itself would be developed by carefully chosen 3rd party studio with needed expertise. Such deals assume financing from our side in return for much higher revenue share than in licensing deals, and we would of course own IP rights in the game. We can still hire few people in G5 in order to strengthen our platform (social features, cross-selling, etc) and production team (to oversee more games in development). You can also anticipate strengthening of the board and financial departments in anticipation of Nasdaq OMX listing.

NI: Can you say anything about your new shareholders?
VS: They are high profile Nordic institutional and professional investors, some 15 entities total. I am sure you will recognize some names, and they are long-term investors. We believe it is good addition to our shareholder structure given our planned move to Nasdaq OMX Small Cap.

NI: There is always alarm bells ringing when management is selling shares. You are obviously retaining a large share of the company but could you please elaborate on what made you sell a part of your holding?
VS: The issue was substantially oversubscribed with some orders being especially large, so it has been to company’s advantage that there was a possibility to increase the number of shares in the offering. As mentioned in the press-release, major shareholders remain committed to the company. There are no plans on selling further as far as I am aware. Please note there were never any share lock-up agreements in place with major shareholders previously yet it was never a question about their commitment. Management believes G5 has the potential to increase its value substantially from current levels. The fact that shareholders divested a minor part of the holdings will help them focus on further growth.

NI: Any news on the timing of the relisting?
VS: As we communicated previously, if approved, the listing is to take place in the 2nd half of the year. There are a few formal boxes to check which would require us to go through interim report or two before applying. Otherwise we consider the company ready. Of course the final decision lays with the listing committee.

Conclusion:

We were somewhat surprised by today’s announcement. We see the following implications:

Positives: 

  • Increased credibility and stability for the case due to institutional ownership
  • The issue was oversubscribed which indicates strong interest for the case
  • G5 seems committed to fulfill the requirements for a relisting to Nasdaq OMX as soon as possible
  • Likelihood of reaching the company target of revenues of SEK 300m and maintaining the historical growth rate has increased, due to stronger financial muscles available
  • Increased attention for the G5 case in the public
  • Revaluation will start at the latest once the shares a listed at Nasdaq OMX

Negatives:

  • Ownership dilution. 2013 EPS will, ceteris paribus, be negatively affected by the dilution effect. Longer term, this should be offset by increased earnings growth potential
  • Owners reducing their shareholding. We understand that the owners had to sell-off some of their shares in order satisfy institutional interest. Furthermore, committment to the company still seems strong but any further reduction in their shareholding  within the coming two years, would be a negative factor, in our opinion. A takeover by one of the major players in the mobile gaming industry should be a far better exit possibility for all shareholders at far higher share price levels.

 

Nordic Investor

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