(Bloomberg) -- Ubisoft Entertainment SA shares sank 12% in Paris after Chinese gaming giant Tencent Holdings Ltd. raised its stake, which analysts said could put a full takeover on the back burner.
Tencent will buy 49.9% of the Guillemot Brothers Ltd. holding company, according to a statement late Tuesday. The Chinese tech giant will pay 200 million euros ($198 million) to buy an indirect stake in Ubisoft at an implied value of 80 euros per share, and invest a further 100 million euros in the holding company.
The transaction also authorizes Tencent to eventually raise its direct stake to 9.99% from 4.5% currently. The brothers will remain in control, and Tencent won’t have any operational veto rights.
The French video game publisher has been deemed a takeover target as concerns over delayed launches and allegations of sexual misconduct pushed the stock down about 45% since the start of last year. Its status as one of the few remaining independent video game publishers has also fueled interest after Microsoft Corp. agreed to buy Activision Blizzard.
Tencent’s increased involvement will give the brothers, who founded Ubisoft in 1986, some certainty in the shareholder register while the recovery plan takes hold. Chief Executive Officer Yves Guillemot introduced cost cuts and in July reduced the full-year sales target as Ubisoft announced a delay to its upcoming Avatar game from the 2022 holiday season to the next fiscal year.
The deal with Tencent “helps us bring stability in the shareholding of the company,” Guillemot said in an interview.
Tencent is ratcheting up international expansion efforts after a slumping economy and tightened regulations choked off growth at home. It recently purchased a stake in Japan’s FromSoftware Inc., maker of global hit Elden Ring, and last year spent $1.26 billion to acquire British game studio Sumo Group. Tencent’s strategy to date has been to tap popular franchises from investees like Activision Blizzard Inc. and turn them into mobile hits -- as it did with Call of Duty Mobile and PUBG Mobile.
Tencent, which bought a stake in Assassin’s Creed-developer Ubisoft about five years ago, is likely to help the French studio introduce franchises such as Rainbow Six Siege to China. Beijing is gradually relaxing restrictions on gaming nationwide.
“The plan then and still is to cooperate on mobile games using Ubisoft IP and to bring key Ubisoft PC games to China,” said Matthew Kanterman, director of research at Ball Metaverse Research Partners. “If and when the regulatory environment improves and we start to see approvals for foreign games again, these popular global franchises could stand out in an increasingly saturated and mature China online games market.”
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Shenzhen-based Tencent has been selling off assets in recent times, including some of its investments in Chinese online retailer JD.com Inc. and Singapore’s Sea Ltd., which operates in e-commerce and has a popular mobile title in Free Fire. Yuxin Ren, who heads Tencent’s games business, stepped down from Sea’s board this week, signaling a realignment of the firm’s priorities.
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Tencent initially took a 5% stake in Ubisoft in 2018 to help it thwart a hostile takeover from Vivendi. Ubisoft said the latest deal includes a partnership with Tencent to bring some of its biggest franchises to mobile platforms, but it is also helpful at a time when Ubisoft has been struggling.
Ubisoft has faced a weak lineup of games, delays and a talent retention problem in the wake of a 2020 sexual misconduct scandal that led to the ousting of top executives. Over the summer, the company also delayed Assassin’s Creed Mirage, a smaller entry in the action franchise. Mirage will be set in Baghdad and look to return to the franchise’s stealth roots, Bloomberg reported. Ubisoft will hold an event Saturday to reveal more on the future of Assassin’s Creed as well as other upcoming games.
However, the founding family will retain control. Tencent will not be able to sell its shares in Ubisoft for five years, and after that the Guillemot family will have priority claim on any sale. In addition, Tencent will not be able to increase its stake in Ubisoft beyond 9.99% of Ubisoft’s capital and voting rights for eight years.
After the purchase from the Guillemot brothers, Tencent will have an 11.3% total stake in Ubisoft. It could hold as much as 16.8% of the business through the increase to its direct holding that’s been authorized, according to Bloomberg calculations.
The agreement may allow the total stake in Ubisoft held by Tencent, the family and Guillemot Brothers to rise to 29.9% of Ubisoft voting rights, according to the statement. Tencent is also providing the holding company with a long-term unsecured loan that to repay debt.
The transactions still leave room for another investor to step in.
“If someone wants to make a bid for the whole of Ubisoft, it still can, and the bid will be reviewed by our board,” Chief Financial Officer Frederick Duguet said in an interview.
