BloombergBusinessweek recently had an odd story entitled: Why Did a Chinese Peroxide Company Pay $1 Billion for a Talking Cat? Inside the strange courtship between industrial behemoths and Western video game studios. The talking cat in question is Talking Tom Cat – a childrens game developed by a Slovenian couple (Samo and Iza Login they had legally changed their surname to sound techie) where an animated cat repeats in a high-pitched helium squeak whatever is spoken into an iPhones microphone. BloombergBusinessweek noted:
Talking Tom Catwas an instant hit, launching a franchise whose titles have reached No.1 in more than 100countries on the App Store. Today, almost 350million monthly active users support the apps, and Toms YouTube channel has more than 2billion views. Unlike many mobile app creators, the Logins have proved adept at turning popularity into profit. PlayingTalking Tomtriggers an onslaught of advertising and in-game purchase offers, and Outfit7 earns more than $100million a year.
The founders decided to cash out and Goldman Sachs found a buyer a Chinese chemical company called Zhejiang Jinke PeroxideCo who were willing to match their asking price of $1 billion. If that sounds like an odd combination, its actually not as BloombergBusinessweek goes on to note:
A real estate magnate in Beijing bought Legendary Entertainment, the movie studio that made theDark Knighttrilogy, for $3.5billion. A maker of construction materials bought Framestore, the company behind the special effects in theHarry Potterfilms. Zhejiang Dragon Pipe ManufacturingCo. acquired app developer Entertainment Game Labs. And perhaps strangest of all, Digital Extremes Ltd., which created an alien battle game, and the studio Splash Damage Ltd., which made an offshoot of the Xbox hitGears of War, were bought by an enormous Chinese poultry processor.
In fact, 70% of all acquisitions of game companies since 2015 have been by Chinese buyers.
The deal activity can best be understood as a consequence of quirks in the Chinese stock market. In China, industrial companies trade at valuations theyd never receive elsewhere in the world. Affan Butt, an investment banker who helped facilitate the sale of Jagex, says some may trade at as much as 100times their annual earningsmore than four times the multiple of General ElectricCo. This means they can acquire companies at what is effectively a discount. A target like Jagex is worth more once its part of a Chinese-listed company, allowing the acquirer to pay prices that appear bafflingly high to the rest of the world. Zhongji saw that arbitrage opportunity, Butt says.
Basically, Chinese companies are betting that by adding game studios that have better margins than a stodgy industrial business, their stock price will rise while Chineseregulators and investors focus almost exclusively on a companys bottom line.
That brings me to small cap mobile gaming stock SPYR Inc (OTCMKTS: SPYR) which is probably notwell known outside of gaming circles, but its well positioned in both the mobile gaming and the burgeoning eSports market to potentially become the next Talking Tom Cat that catches the attention of Chinese companies.
Utilizing the popular “freemium” monetization model, which leverages advertising as well as in-app purchases, SPYR Inc has already developed and published a diverse range of fun and engaging social games for mobile devices while itspopular real-time space battle game Pocket Starships is being modified into an eSports tournament-style format to allow for organized online and offline competitions to compete for advertising and player revenue.
Pocket Starships is available to gamers on a wide range of platforms and devices, including iOS, Android, tablets, PCs, Macs, Kindles, Amazon and Facebook. In late April, SPYR Incannouncedthat Pocket Starships is available for download and play on VK.com (VK) – a social networking site very similar to Facebook thats Russia’s largest Social Network and the fifth most visited website in the world.
Aside from further developing and making Pocket Starships more widely available, SPYR Incis continuing to seek out publishing agreements for new game titles in various stages of development as well as consider games in a diverse field of genres. The ultimategoal is to create a portfolio of gamesthat appeal across multiple demographics for a regular and consistent revenue stream that will be attractive for both investors and potential acquirers.