Spin-offs / HoldCo Discount Elimination – 25%+ Upside
This idea was shared by Daniel.
TLDR: A 20%-50% conglomerate discount that might get eliminated with short-term catalysts, including upcoming capital market days, spinoffs, and increased awareness of the Lord of the Rings (LOTR) franchise due to an upcoming cinematic release.
Background
Embracer Group, originally founded as Nordic Games in 2011, was a relatively insignificant regional publisher that found success with a select number of titles. The Embracer Group of today was really born in 2014 when it bid for a number off assets of former industry giant THQ.
Starting in 2018, the company began aggressively acquiring studios, many of which previously had publishing relationships with THQ, such as Koch Media (now Plaion), in an attempt to gather its remnants back together. Some targets did turn out to be good uses of capital, such as DECA, which was bought for a maximum of €60m including earnouts and now generates well-above €100m in sales. But during 2021, Embracer massively overpaid for several big-ticket studios: announcing the purchases of Easybrain for $640m, Aspyr Media for $450m and Gearbox Software for $1.3 billion all on a single day. Thankfully, almost all this consisted of either deferred consideration or stock, with only $250m paid upfront. As Embracer’s market cap at the time exceeded €12 billion, the damage was limited to moderate dilution. In December 2021, Embracer announced its biggest ever acquisition, the table-top gaming company Asmodee for €2.75 billion. This increased overall leverage by approximately €2 billion.
Two more astute acquisitions were completed in 2022, when Embracer purchased a number of assets from Japanese publisher Square Enix, including the IP to Tomb Raider and Deus Ex, for $300m. Significantly, Embracer also managed to purchase Middle-Earth Enterprises, the Lord of the Rings rightsholder, for just $395m. Commercial terms were never disclosed and there may be performance-related consideration, but this price was well below what they were rumoured to be worth. There is more than meets the eye here so I will discuss some of the interesting aspects of this acquisition later on.
It seemed like the flywheel would carry on spinning, but several underperforming titles and a $2b Saudi investment being pulled in 2023 led to a 40% drop in the stock price. The company embarked on a painful cost-cutting exercise that led to the loss of 4530 employees and closure of 44 studios. The most cash-hungry developers were sold, including Gearbox and Saber, the corporate structure was streamlined, and management focus turned from M&A to cash flow. In April 2024, Embracer announced it would split into three separate publicly traded companies by the end of 2025.
Asmodee
Asmodee is the first spinoff scheduled to take place by Q1 2025. It is very likely the third largest board game company in the world by sales after Hasbro and Mattel, with a stable, capex-light business generating €1.27b in TTM sales and a 13% EBIT margin. Some notable games include Catan, Exploding Kittens, Azul and Pandemic.
It has been through two rounds of private equity ownership in the last decade, during which time it has been the subject of aggressive roll-up activity. It was last sold in 2022 by PAI partners who were initially reported to be looking for €2b but ended up receiving €2.75b from Embracer. While there may have been competing bids, it seems probable Embracer ended up overpaying, and its fair value remains close to €2b.
Looking at comparables, there are the three major toy companies, as well as Games Workshop which has its niche in the tabletop arena. They are all larger and growing just as fast (or faster) than Asmodee is, so I believe a cautious multiple to apply would be 11x EBIT, which would result in an EV of €1.85b.
Coffee Stain & Friends
Coffee Stain has an excellent reputation as an Indie/AA games publisher, and will contain several studios under its banner, with the spinoff planned around the middle of 2025. This proposed company has €0.92b in TTM sales and a 28% EBIT margin, with moderate capex requirements. Around half of sales will consist of paid PC/console games like the well-received Goat Simulator, Deep Rock Galactic and Satisfactory, as well as some free-to-play platforms such as Star Trek Online. The other half will consist of largely free-to-play mobile games, around two thirds of which are Easybrain puzzle games like Sudoku.com. The remaining third are F2P MMOs/RPGs/Action titles from Deca, and these are the least desirable assets in my opinion given their reliance on microtransactions, which have come under increasing scrutiny and are attracting the eye of regulators. Those revenue streams look vulnerable given their in-app purchases will be aggressively marketed, often to children, and are a core part of the gameplay design. Despite this, they stand at less than 20% of overall sales, so the Coffee Stain package as a whole remains very investable and generates high margins in line with competitors.
Interestingly, Coffee Stain will have several direct peers also listed on the Nasdaq Stockholm. MTG is a mobile developer that has a very similar portfolio that stretches across both mainstream F2P and puzzle. Stillfront is another mobile-only dev whilst Enad Global 7 has become a MMORPG specialist with the acquisition of Daybreak Games. Paradox is the 800lb gorilla in the room and trades at almost triple the multiple of the rest of the group. There is some debate as to whether that premium is warranted but there is no denying it is a quality operator with sticky franchises and so is less directly comparable to Coffee Stain.
Digital Bros is an Italian AA studio that makes the Assetto Corsa racing games and has published a variety of games including Terraria and Payday. Team17 is a British dev best known for the Worms and Escapists franchises but has recently had problems with management execution. Playtika is another mobile game producer but has a product mix that includes gambling apps so is the least relevant in my opinion.
The mobile developers have traded at depressed multiples (average of 9x) for the last couple years off the back of greater exposure to a weaker advertising market, as well as Apple’s IDFA changes affecting targeted user acquisition. This segment is not expected to show much growth (if any) over the next year or two and has the highest regulatory risk as mentioned above, so I see little reason for improvement. The Indie/AA studios however do command quite healthy multiples at 19x, or 15x ex-Paradox and are expected to put up solid growth in the coming years now they have rightsized after the COVID-era boom. So, with a rough 50:50 split between mobile and multi-platform, I think 10x is a suitably conservative multiple to attach to the combined group.
Middle Earth Enterprises & Friends
Middle Earth Enterprises & Friends will consist of Embracer’s remaining assets, namely its AAA development portfolio and top-tier properties like Tomb Raider, Lord of the Rings, Metro and Kingdom Come. It will also include other subsidiaries like a small comics publisher and licensing operations. TTM sales are €1.05b at an 11% EBIT margin, but this masks large capitalised development costs which reduce its FCF margin to below 10%.
I think it is worth diving deeper into Middle Earth Enterprises specifically, as I think this assets’ intrinsic value is far more than the $400m initially paid. Under current arrangements, this entity owns the master worldwide rights for motion pictures, games, merchandising, attractions and stage productions relating to both the LOTR and Hobbit works. Under license, Warner Bros have held the motion picture rights since the 1990s, and are contractually obligated to continue developing new material and pay milestone payments to MEE. This has led to quite a bit of tension between the studio and the former owner of MEE, the Zaentz Co, which has accused WB of reneging on the deal terms. It is likely the result of this that Warner Bros is releasing its new animated feature “The War of the Rohirrim” this Winter. It was reported the two parties were in private mediation, but it is unclear if there has been any progress. What is certain is that Warner Brothers must continue producing new films or risk losing its rights, after which Embracer can auction them to the highest bidder. Additionally, the synergies Embracer could potentially gain are large – management have repeatedly spoken about managing the property cohesively. Several video games are already in the works, including a simulation game developed by Weta Workshop, known for their work on Peter Jackson’s film trilogy, which will release in Q4 2024 to tie in with “War of the Rohirrim”. Amazon are also planning an MMO which I will mention below.
There are theories the surprisingly low price of MME’s purchase stems from upcoming copyright expiration, but I don’t believe that to be relevant. In many major markets, Middle Earth derived works lose protection in 2044, but in the US the Lord of the Rings will be covered until 2050 and trademarks will remain indefinitely. Furthermore, I believe this incentivises the creation of more LOTR media in the next decade as rightsholders rush to profit from an underutilised IP.
MEE is the hardest of the three to value, as the proposition is largely driven IP ownership, and it is tricky estimating how much that is worth. Looking at some groups like Disney, Endeavour and Liberty shows how much the market appreciates unique media properties. You will notice that most of the AAA companies carry little to no debt and are cash cows with durable franchises that are growing consistently. For this, they are richly rewarded with the highest valuations in the gaming sector.
All of that somewhat contrasts with Ubisoft and MEE, though there are two peers I think are useful to look at. Take Two Interactive and CD Projekt behave in the traditional cyclical way in that they invest heavily in big-budget games over several years before reaping a large inflow upon release. Therefore, they only generate a substantial profit in release years, otherwise operating at breakeven or a loss. Take Two for example is currently loss-making as it prepares for its biggest release in a while with GTA 6 next year. Like Embracer, it is also debt-burdened, having been on an acquisition spree of its own, culminating in the $13b purchase of Zynga in 2022. It has historically traded in an EV/EBIT range of 20-40x, while CD Projekt has traded around 15-30x. Of course, Middle Earth would not have two vital things that support such a valuation, true scale and a long track record of almost bullet-proof success that gives investors confidence to ride out the release cycles, but it is interesting that the market also values companies that can mine their IP and don’t focus solely on recurring revenue. I don’t consider it a stretch to say Middle Earth could trade closer to CD Projekt over time.
Over in Japan, Capcom, Koei Tecmo and Square Enix are premier enterprises with blockbuster properties. Capcom is a master at monetising its back catalogue and that has significantly rerated the stock. Koei Tecmo and Square Enix are smaller, closer in size to Middle Earth Enterprises as an entity, but also own a wide array of popular franchises, though Square Enix has been the weaker of the two as it has chased fads like blockchain.
Ubisoft, as anyone who has remotely followed the gaming business will be aware, is affected by idiosyncratic factors: its core business is in serious decline, with years of underperformance, dysfunctional management that has overseen scandals of the most grave kind and a focus on financial engineering to fight for control and please analysts in the short-term that was so adventurous it may have made even Lars Wingefors blush. With a consumer reputation that has hit rock bottom, I do not consider Embracer to be in a similar position despite its recent troubles and do not believe it should be attracting an identical multiple.
In contrast to Ubisoft’s concentrated decision-making, Embracer is well-known to operate with a “bottom-up” style of management, allowing studio executives great levels of independence, occasionally to its detriment but enabling it to be more manoeuvrable after setbacks. Whilst it has had its fair share of flops, it continues to develop quality games under its stewardship, including Metro Exodus, Dead Island 2, and the chart-topping Space Marines 2 that was sold off as part of the Saber deal. It has successfully avoided the oversaturated “live-service”/multiplayer subset to focus on other underserved segments, such as single player games with excellent storytelling. Even so, I will assign a multiple of just 8x, equal to where Ubisoft was trading before the recent takeover rumours and enough to provide a comfortable margin of safety.
Valuation
Under the current plans, Lars intends to remain an active shareholder of all three entities. He currently controls 20% of the stock and 40% of voting power. Savvy Games Group, the Saudi investment company, owns 8%. I see this as a positive for all three companies, as it will encourage continued collaboration, such as more Lord of the Rings tabletop games.
It’s difficult to get a read on what net debt will look like 12 months out as divestments and earnouts are still taking place, though they are expected to be slightly accretive. Giving Asmodee a net debt of €700m is right in the 4x leverage sweet spot Embracer guided during their spinoff announcement, with the remaining pro-forma net debt split across Coffee Stain and Middle Earth (I tilted towards the former given its more regular FCF). That results in a leverage ratio of 0.9x for Coffee Stain and 1.2x for Middle Earth, which is in the ballpark of both segregated and group targets. Middle Earth is currently stretched due to disposals of near-term cashflowing titles, a lull in the release schedule and a decline in LOTR related-licensing income compared to the prior period. This demonstrates why the capital restructure is required but the company should be able to delever.
Running with the conservative multiples, the whole group of companies should be worth €4.25b, representing over 25% upside. However, applying even modestly higher valuations shows the opportunity available. Giving Asmodee a bump to 13x EV/EBIT (nearly 35% below the average) increases equity value by over €300m. Raising Coffee Stain to 12x (just under the average ex-Paradox) increases equity value by €500m, and expanding Middle Earth from 8x to 9x (still below every peer including Ubisoft) increases equity value by over 100m. Overall upside would rise to 54%. This also doesn’t include any gain from the group deleveraging, especially Asmodee. Supposing Asmodee uses its expected €170m FCF to pay down debt, equity value in twelve months would rise by the same amount, further boosting upside to 59%. This may be highlighted during the Asmodee Capital Markets day on the 19th November.
Middle Earth Enterprises is left as the riskiest proposition of the three, given it will require continual financing to invest in new titles, which is less attractive to investors, and that is where a potential takeover comes in.
On October 10th the head of Amazon MGM Studios, Jennifer Salke, was asked by Variety whether Amazon would potentially acquire Embracer. In reply Salke said “We’re always talking about those opportunities but I don’t have anything to share [right now].” Whilst not indicative of anything, it does not rule out the possibility, and there are strong incentives for such a transaction. Amazon has long wanted to build a marquee games division, so far without any success, but it is coincidentally working on big budget projects using Embracer’s two most significant IPs: a Lord of the Rings MMO and a Tomb Raider TV series. Both of these properties will sit neatly in the Middle Earth Enterprises & Friends pack. Those more conspiratorial could even speculate that the Coffee Stain spin off from Middle Earth is designed purely to remove as much excess fat as possible from a future Amazon acquisition, though I’m not sure I would personally agree. However, if Amazon were looking to vertically integrate and save on licensing fees whilst boosting its Prime Video and Twitch streaming services, it need look no further. The stock pumped over 5% just on this mild statement, so there could clearly be lots of additional room to run.
Risk Considerations
Some big risks include the possibility of noise in the segregated financials – Embracer has been known to be an enthusiast of adjusting items in the past. One will only know for sure after the transactions have taken place, but Asmodee for example has generated similar or even higher margins in the recent past. This thesis is also based on the three companies continuing to perform in line with expectations for the next year. The gaming market overall does seem to have recovered some momentum but there is as always the risk of specific titles underperforming.
I think there is clear value here that is being overlooked. There have been mistakes in capital allocation of course, but I question the rationality of those calling a corporation that has delivered over 500% since IPO a “disaster”, and I think there is the possibility of profiting from that view.
Would anyone have an update given today’s pullback?
I’m not entirely sure what drove the 10% dump specifically, but it is down around 14% since the election on what seems like increased fears of disruption from US tariffs. There is some research suggesting board games could see big price increases:
https://www.emarketer.com/content/trump-tariff-plans-prices-skyrocket
Toy peers have also slipped given their economics + China exposure. I think this is a slight overreaction given only 20% of tabletop sales are US bound and Asmodee is itself only one part of the overall story. The company had to face a trade war situation before, as well as COVID supply chain challenges so this is something management will be aware of.
My tracker is now showing over 35% upside to my conservative SOTP (which still values Asmodee well below comps, even after the recent declines). Asmodee’s capital markets day is on the 19th and Embracer’s Q2 is tomorrow, so we should hear plenty on how the process is getting along, and of course capital markets conditions in general are improving which should help with the largest float occurring in Q1.
Wow, lots to unpack from the earnings this morning!
Easybrain, which was going to held within the second spinoff, has been sold for $1.2b in cash, representing a big ROI since purchase three years ago. Embracer ex-Asmodee now has a pro forma net cash position of ~€750m. I need to work out exactly this affects upside + the spinoff strategy but needless to say this is very positive.
Trading wise, organic growth was -14%, with console/PC games and Entertainment the weakest with a lack of releases meaning tough YoY comps. FCF was negative as working capital was tied up in board games and comics ahead of busy season but strong cash generation is expected in H2, and LOTR licensing should be recognised during this period too. There is an earnings downgrade for next year due a delay in some releases as Embracer prioritise quality and release windows.
Importantly, Asmodee margins improved YoY which bodes well ahead of that event.
Had a chance to run the numbers:
The multiple on the Easybrain deal was 9x EBIT (actually the average for mobile cos that I found in the OP), and as I used 10x to value the Coffee Stain segment, this is slightly dilutive, with base upside reduced to ~21% and optimistic upside to ~42%. Whilst the remaining business is slightly less profitable, it is still large among peers and now mostly non-mobile, which as discussed attracts a higher multiple, so I believe the assumption is still sound, with the stretch goals probably more appropriate than before given that, alongside the significantly strengthened balance sheet.
Another thing that just occurred to me: post-election, Amazon certainly wouldn’t face any anti-trust opposition to a buyout either..
@DanielK could you please state the updated base and optimistic valuation levels in terms of equity value (in euros)?
Not sure what’s the reference price based on which your 21% and 42% upside numbers are calculated.
Based on the 11/14 closing price of 28.79, the base and optimistic targets are SEK 34.8/share (euro 4.1 billion) and SEK 40.9/share (euro 4.8 billion), respectively?
It looks like, at SEK 32.3/share today, we are already very close (8% spread left) to the base case target of SEK 34.8, and the margin of safety is now much smaller than at the time of the write-up?
Thanks!
Hi, here’s a link to my updated valuations with the changes highlighted in red post-Easybrain: https://imgur.com/a/Mh3qnlf
Those price targets are approximately correct, my working is showing 5% upside on the base and 25% on the stretch after the more than 10% run-up this month. I wouldn’t be surprised if the price exceeds the base because they are very undemanding multiples and leverage is much reduced – Asmodee particularly I expect to float at higher than 11x EV/EBIT.
There definitely is a smaller margin of safety now, so its a question of whether you would want to wait out the remaining 6-12 months to realise more upside vs the risk of something going awry like some funny business with the adjusted financials.
Daniel, Thank you very much for sharing! I think the Asmodee spin-off will be a key catalyst .
On leverage, why do you think shifting €400m leverage from Asmodee to the parent (and the consolidated leverage remains unchanged?) will help the the sum-of-the-parts valuation?
Is it because the same dollar of cash will be worth more in the hands of Asmodee (when it goes public independently) than in the parent?
I agree, think it helps keep the Asmodee leverage ratio more sensible, but I don’t think it will make a huge difference to the valuation. For reference I calculated the leverage as follows:
From the Capital Markets day (https://embracer.com/wp-content/uploads/2024/11/Asmodee_Capital_Markets_Day_2024.pdf):
Asmodee ring-fenced net debt: €893m
Post Embracer investment: €493m
From Q2 earnings (https://embracer.com/wp-content/uploads/2024/11/Q2-FY-2425-Presentation.pdf):
Net debt post divestment: €45m
Net cash ex-Asmodee: €770m
Implied Asmodee net debt: €820m (not exactly as above due to rounding)
PF net debt:
Asmodee: €493m
Embracer: €770m – €400m = €370m
I used €260m in my SOTP to be on the safe side.
Not much unexpected from the Asmodee CMD. Still on track for a listing before end of Q1. Refinancing their €900m bridge with an offering of five year notes. Guidance as expected with margin improvement and growth for next year. The main update was a €400m investment from Embracer to bolster the balance sheet using part of the Easybrain proceeds. That doesn’t affect the overall picture too much but does lower leverage from over 4x to just over 2x. Regarding tariffs they said they partner with Western manufacturers for a lot of their games, including Catan which is US made.
Assuming the market cap is at least €1.5b post spin, I’ll be selling, as I’m not sure about their continuing M&A strategy and I’m happy enough with remainco’s 25% exposure.,
Dungeon Investing did a nice in-depth analysis for anyone interested: https://www.dungeoninvesting.com/p/asmodees-debutante-ball?publication_id=1841156
Divestment of Easybrain was completed yesterday. The stock already trades above Daniel’s base case target.
Trading of Asmodee’s Class B shares is set to begin on Nasdaq Stockholm under the ticker ASMDEE on February 7, 2025
https://embracer.com/releases/trading-in-the-class-b-shares-of-asmodee-on-nasdaq-stockholm-is-expected-to-commence-on-7-february-2025/
Swedish analysts expecting Asmodee could fetch 12-13x EBIT (€1.9b), in line with my stretch target, and equivalent to almost half of present EMBRAC market cap.
https://www.affarsvarlden.se/aktierekar/embracers-avknoppning-asmodee-kan-varderas-till-kring-22-miljarder-kronor-analytiker
What’s your estimate for the RemainCo’s fair value?
With Embracer unexpectedly releasing a Q3 trading update yesterday, the stock is up another 10% and almost bumping up against my stretch target. PC/console was particularly strong with EBIT 5x better than expected (21% margin). This is interesting considering the LTM (and comparable quarter YoY) margin was in the teens for that side. Asmodee also posted solid organic growth of 13%, which is good news for the spin next week.
I think I’m going to redo the math for the remainco, incorporating forward expectations, as I find it likely the company will rerate further post split now that it will trade at a lower effective multiple.
There is also a big release upcoming with Kingdom Come 2. Market expectations are likely to be met and possibly beat which is positive for sentiment over the next few months. A Nordic analyst covered this today: https://www.lindresearch.com/p/embracb-kc-d2-market-expectations-and-data-indications
Today marks the ex date for Asmodee shares, so Embracer shares are currently down 100 SEK, effectively valuing Asmodee at €1.9b, the top end of estimates. The remaining equity is worth approx. €2.5b, which is in line with my original stretch target. However, the market seems to be assessing Embracer’s €400m investment into Asmodee at 0, at least for the time being, which I guess isn’t unusual. I will be providing my updated SOTP after we get the latest pro-forma financials at the Q3 earnings next week, where we will also have a few days of Asmodee trading too.
Kingdom Come: Deliverance 2 is at #1 on the global Steam charts and is likely to drive further material analyst revisions on top of the upbeat trading update. Another note from Lind Research: https://www.lindresearch.com/p/embracb-strong-kc-d2-critic-score-topping-charts-asmodee-x-date?utm_campaign=embracb-strong-kc-d2-critic-score-topping-charts-asmodee-x-date&utm_medium=newsletter&utm_source=www.lindresearch.com
By “the market seems to be assessing Embracer’s €400m investment into Asmodee at 0”, you mean Asmodee is currently undervalued?
Q3 Update:
Asmodee’s spinoff was successful, with shares closing at 111 SEK on Friday at a €2.2b mcap.
Moving on to the Remainco, Q3 results were slightly disappointing due to soft back catalogue sales, but this was offset by strong momentum in mobile and optimism for Q4 and beyond thanks to KC:D2 topping 2 million copies and another 2 AAA projects slated for release in FY26. This has resulted in ~€50m increase in analyst expectations for the principal gaming segment for the next fiscal year, which mostly lands in the Middle Earth segment.
Having taken a fresh look at industry multiples, there is not much change. The mobile/AA segment remains in the mid teens on both a forward and trailing basis. The AAA segment has become more expensive with the average TTM multiple now in the thirties, driven by significant rerating of the Japanese companies, as well as the troughing and expected recovery of Ubisoft. The last of these has driven the average forward multiple down to 26. As a result I feel it is prudent to increase the assumed multiple for Middle Earth from 9x to 10x, still well below any of the AAA studios and even some of the AA ones.
I am sharing the latest SOTP here: https://i.imgur.com/HGygVm3.png
The first table shows the updated upside on a TTM basis, where there is not a huge change. Embracer is trading a 12x EV/EBIT multiple on a consolidated basis ignoring their stake in Asmodee, or 9x if you include.
The second table shows pro-forma expectations for FY26, using segment growth from current analyst estimates, which relies on continued mobile growth to power Coffee Stain and KC:D2 contributing to Middle Earth over the year (which is more derisked now the release has succeeded). You can see there is a massive improvement in margins and potential for 50-80% upside depending on how much the market decides to value the Asmodee stake.
How sensible are those expectations? Well Embracer posted EBIT of €55m for Q3, so taking into account seasonal effects that’s a rough annual run rate of €200m. KC:D2 has likely generated close to €100m already and is highly likely to sell another €50-75m through March 2026, which together with other new releases like Killing Floor 3 in March (#26 on the Steam wishlist chart) would get us over the line. Still, it will require good execution.
Another small catalyst is that the Q4 results in May should finally see the huge €1b impairment booked in Q4 24 slip off the TTM window. This means Embracer will start to show up as profitable in screeners and may lead to more visibility.
For Embracer’s stake in Asmodee, how was Embracer’s €400m equity investment into Asmodee translated into ownership percentage? Were the shares issued to Embracer at €1.5b or €2.2b valuation?
I checked Asmodee’s investor relations /ownership structure web page, Embracer doesn’t show up as a shareholder. Did Embracer take equity ownership in an Asmodee subsidiary instead?
For the €541m number for Embracer’s stake, how do you reach this number? As you already discount it by 30%, do you mean the intrinsic value is as high as €772m (=541/0.7)?
And about the Coffee Stain spin off, is this still on track for a mid 2025 launch? Do you think this will be a larger catalyst than the Q4 results?
From page 81 of their prospectus:
“In January 2025, following the closing of Embracer Group AB’s divestment of Easybrain, the Company’s Board of Directors resolved to carry out a directed share issue pursuant to which Embracer Group AB subscribed for class B shares in an amount of EUR 400 million at a subscription price of approximately EUR 5.84 per share (the ”Equity Investment”). A total of 68,486,367 class B shares were issued in connection with the Equity Investment.”
5.84 EUR = 65 SEK/€1.37b
https://cdn.svc.asmodee.net/production-payload-corporate/Prospectus%20Nasdaq%20Stockholm%202025-3.Prospectus%20Nasdaq%20Stockholm%202025
You can also see changes in equity capital on pg 98 which includes the issuance. Total share count is slightly higher than what I have used (234m vs 225m).
The stake is currently valued at ~€680m – my figure is actually only discounted by 20% as that was my initial working which I seemingly forgot to update – apologies!
This is all napkin math anyway but at a 30% discount the stake is worth ~€470m, which reduces the upside in my latest SOTP a couple percentage points.
Is it possible that these 68m shares were already distributed to Embracer shareholders in the spinoff?
The ownership structure page of Asmodee shows that (as of 2025-02-07) Lars Wingefors AB is the largest shareholder with 8.7m A shares and 35m B shares, and no one (Embracer or not) owns 68m B shares.
The almost identical ownership structure of Embracer and Asmodee suggests that Embracer did not retain any Asmodee shares in the spinoff and distributed all to shareholders.
I’m pretty confident they’ve retained it. Following on from the above disclosure on their prospectus:
“Asmodee will use EUR 300 million of the proceeds from the Equity Investment to repay debt incurred in respect of the Bonds. The remaining EUR 100 million will be used to further strengthen Asmodee’s balance sheet and allow Asmodee to resume its M&A strategy”
This is in contrast to the listing which Embracer have usually named the “distribution”.
I believe Embracer have also said they intend to keep the stake, so looks like the website hasn’t been updated yet.
Embracer has 225m shares outstanding.
Asmodee had 234m shares outstanding after issuance of 68m shares to Embracer and prior to the spinoff (according to the prospectus) . Among the 234m, ~8m (3.68%) shares belongs to current and former managers of Embracer and were not owned by Embracer.
In the spinoff, every Embracer share was entitled to 1 Asmodee share.
So I think the Asmodee share count was specifically designed to ensure that all 225m Embracers shares previously owned by Embracer were distributed to Embracer shareholders.
Looking at this again I think you’re right, sorry.
https://embracer.com/releases/trading-in-the-class-b-shares-of-asmodee-on-nasdaq-stockholm-is-expected-to-commence-on-7-february-2025/
They did confirm all shares will be distributed after the investment closed on Jan 24. I thought I had seen Embracer mention keeping their ownership in their communications but I must be mistaken. Not a huge impact on the SOTPs, EMBRACB is trading at the original stretch with 60% upside to the new target as of today.
Embracer is down 10% since Q4 earnings. Most of the headlines focus on the YoY sales decline of 6%, but organic growth (ex. divestments) was 19%. I think the main disappointment is the delay of two out of three planned AAA releases for 25/26. Amy Hennig’s anticipated Marvel 1943: Rise of Hydra has been pushed to the end of the fiscal year, and the unnamed third title is now slated for 26/27 release. This has reduced analyst sales estimates by 1b SEK, Upside to SOTP now stands at 54%.
Mobile margins have taken a hit due to a large increase in user acquisition costs, though they are guiding for this to somewhat normalise next quarter, and its also worth mentioning they could benefit from the recent ruling that strips Apple’s ability to charge fees on some app purchases. Embracer noted this saying they had “seen positive incremental market developments, especially regards to mobile app store fee dynamics.”
https://www.gamesindustry.biz/apple-can-no-longer-collect-fees-on-purchases-made-outside-the-app-store-in-the-us-court-rules
Coffee Stain spinoff remains on track to complete this year, after which remainco will be called Fellowship Entertainment. Upside remains attractive as Embracer trades at 7x next years EBIT on an EV basis.
https://i.imgur.com/3eF7SHf.png
Swedish AM Lancelot have mentioned Embracer in a note, seeing the Coffee Stain spinoff as a key catalyst. They expect it to trade at 30-45 SEK per share, or €600-900m (5-7x EBIT), due to it’s high operating margin. With 25 SEK in consolidated net cash, that means the remainco is currently valued at just 41-56 SEK, or €830-1130m (5-7x EBIT), which they see as too cheap given the size of the business and it’s key IP, Lord of the Rings. They do point out there are execution risks but expect a timeline of 12-18 months.
https://www.lindresearch.com/p/idea-note-embracer-group-undervalued-gaming-conglomerate-with-multiple-value-catalysts
Lancelot have owned Embracer for several years. As of 2024, they owned a 0.25% stake. Overall seems like they value Coffee Stain less than I do but remainco about the same. So probably 20-30% upside from current levels.
What do they mean by “a timeline of 12-18 months”? I assume the spinoff is expected this year?
Coffee Stain is expected this year yes. I presume this is for the whole special situation, with remainco rerating after all divestment activity.
Are we still expecting the Coffee Stain spinoff this year and at 30-45 SEK per share?
With 25 SEK in cash and 30 SEK from Coffee Stain, Is the remainco now valued at only 28 SEK per share or €830m?
Coffee Stain spinoff is still on track yes, and its performance was more stable than Embracer’s, so I think 30 SEK is definitely achievable. Current net cash is €440m = 18 SEK, and they should see more inflows when their current titles release over next 12-18 months.
At the latest price of 86 SEK, Embracer (or “Fellowship”) is worth 38 SEK per share = €765m. That feels pretty cheap to me given Square Enix (Tomb Raider) and Middle Earth (LOTR) alone were purchased for almost the same amount, at what were widely considered bargain prices, and the group also has many other IPs such as Kingdom Come, Dead Island, Metro, plus a comics business in Dark Horse. If Coffee Stain actually ends up being worth closer to 45 SEK (which is not a stretch), then its even cheaper.
For those still following, Embracer was down 20% last week after weak results, mainly due to -22% organic growth in console/PC (poor back catalog, no new releases) and slashing EBIT guidance to €90m. Like a lot of guidance cuts recently, it seems to be conservative and they expect to beat, updated consensus for 25/26 is €170m. Balance sheet is still strong with €440m net cash, which means EV is just ~€1.2b. So 12x EV/EBIT if they barely overcome their new guidance, 7x if they are closer to analyst estimates. Given FY26 is now likely to be broadly flat against FY25, same kind of upside remains against the original target of ~120 SEK, but with a lot more uncertainty. Not a great update.
Lind Research have now added EMBRAC to their “conviction list” as they have noticed something important – in the year-end results a majority of the former Coffee Stain group was shuffled back into the remainco in the proforma financials. TTM CS revenues reduced from ~€600m in Q3 (ex Easybrain) to €100m in Q4, but EBIT only reduced from €100m to €50m. So it looks like they’re window dressing to make sure only the highest margin studios are included for the spin. It also means remainco EBIT should be €50m higher than I previously thought.
This puts Coffee Stain alongside Paradox as one of the most profitable AA companies in the world. At a 18x multiple they still see Coffee Stain worth 9b SEK (€800m or 40 SEK p/s) and therefore see remainco as too cheap, at less than 3x normalised EBIT.
Another interesting point mentioned is that several management personnel and large shareholders purchased stock after the recent quarterly earnings.
https://www.lindresearch.com/p/embracer-group-embracb-coffee-stain-spin-off-poised-to-unlock-sek-9bn-in-hidden-value
Does management have any capital allocation plan for the net cash of €440m ?
In the Q1 report they mention the following:
“Our intention is to return excess cash to shareholders –
either through dividend or share buybacks. Before this
will be communicated and executed, we need to decide
and communicate the intended balance sheet for
Coffee Stain Group at listing, as well as adjust some
banking agreements that we deem are more technical
adjustments due to our solid net cash position.”
Given the new slimmed down size of CS and remainco being way more capital intensive, I imagine almost all of that cash pile will stay with Embracer. There is potentially €170m of contingent consideration to be paid for previous acquisitions, but this has been reduced over the last few years as targets haven’t been met, and a portion of this is only due in >3 years, so could be settled out of future cash flow.
Further M&A isn’t out of the question. Lars Wingefors stepping down as CEO and moving to Chair will allow him to “focus on matters such as capital allocation, M&A and strategy”.
https://www.gamedeveloper.com/business/embracer-ceo-lars-wingefors-to-become-executive-chair-and-focus-on-m-a
Embracer has announced a 500m SEK buyback. Stock up 5% today and 30% over last month, recovering the drop post earnings. Good move as the stock is clearly below intrinsic value.
Embracer back to 90 SEK after gradual slide since October.
Embracer will spin off all shares of Coffee Stain to shareholders, with net cash position of SEK 500 million.
Ex day is 8 Dec and stock will starting trading on 11 Dec under ticker COFFEE B.
Embracer is down 29% (25 SEK p/s) today which is the ex-date. Market cap for remainco is €1.25b, EV is €0.9b.
Will be interested to see what Coffee Stain opens at.
Is the RemainCo undervalued?
On current estimates (based on the conservative guidance for the year), its 10x EBIT. Probably less as they’ll clear it. Based on more normalised earnings (regular releases when not distracted by the avalanche of M&A over the last 18 months) its like 5x. As others have mentioned that is cheap whichever peer group you look, which are in the teens upwards. In fact, I can only see 3 western gaming companies with similar multiples:
Sega Sammy is at 10x
everplay is at 11x, with a worse catalogue and half the size (more AA than AAA)
Digital bros is at 9x, with a worse catalogue and a quarter of the size (again more AA than AAA)
Even Ubisoft, which is effectively in the middle of disintegrating having laid off 1500 staff and sold 25% interest in its core IPs, trades at 30x (or 17x LTM). Only the pure mobile publishers listed in Sweden are cheaper, and at this point, mobile is a small minority for Embracer so they are not useful comps.
Without wanting to sound like a broken record, you can also look bottom-up:
Square Enix (Tomb Raider) assets were bought for $300m
Middle Earth (LOTR) was bought for $400m
Warhorse (Kingdom Come) was bought for €40m
Deep Silver (Dead Island, Metro, Payday) was bought for €120m
Dark Horse Comics was bought for >€70m
Milestone (MotoGP) was bought for €45m
This isn’t an exhaustive list, but the big two were both described as bargains at the time (LOTR especially I imagine would be worth more after the last few years).
Would you sell the more fairly priced COFFEEB and keep the cheaper RemainCo?
Its opened at 25 SEK today which is an EV of €470m, around 13x LTM EBIT, don’t think NTM is drastically different. Lind Research compare to Paradox at 21x but the average for AA peers is ~16x according to my maths. So there’s a little upside but you probably could sell COFFEEB.
https://www.lindresearch.com/p/embracer-group-embracb-30-drop-reveals-an-attractive-implied-coffee-stain-valuation
(LR make a mistake – the net cash position is SEK 500m not 250m, per the investor materials)
Any hard/soft catalysts for Embracer for the next six months? e.g., Earnings release?
Is it now mostly an undervaluation fundamental play?
I think it’s mostly a fundamental play but 2026 is the 25th anniversary of the LOTR trilogy so there are theatrical re-releases, and final results in May should clear some of the fog re earnings and guidance.
Results in May and more recently August have done as predicted, clearing the slate and surpassing expectations, with the largest revenue beat in at least two years. Embracer is up more than 40% off the March lows and approaching the 52W high. Buybacks have also continued. Remainco trades at 7.5x adjusted FY26/27 EBIT.
With a surprise LOTR remaster announced last week and more in the works, the Fellowship unit looks well placed for it’s spin and an attractive standalone acquisition target. Nearer term delay and interruption risks remain.
Total tracked IRR since posting is 13%, assuming immediate sales of Asmodee and Coffee Stain (holding would have actually delivered more). If Embracer can climb another 20% by the end of the year, IRR would rise to ~20%.