SoftBank Sells Supercell for $8.6B

SoftBank Supecell-SJUNE 21, 2016 • Clash of Clans developer Supercell Oy is being acquired by Tencent Holdings Ltd. from SoftBank Group Corp. for $8.6 billion. Softbank bought a 51% stake in Supercell for $1.5 billion in 2013, and increased that stake to 73.2 percent last year via external investors. Tencent will control up to 84% of Supercell when the deal closes during the third quarter of 2016 after picking up SoftBank’s shares plus those of other stakeholders. Helsinki-based Supercell saw its valuation double to $10.2 billion in the last 12 months. SoftBank will hold no shares in Supercell after the deal closes. Tencent intends to leave Supercell’s current management team in place. More than 50% of Tencent’s revenue is generated by its online titles and last year the company targeted mobile games as a major growth area. Alhough Tencent spent only $231.4 million for Riot Games in 2011, that studio’s League of Legends turned into a global hit. Tencent has also taken investments in other studios, such as its 48.4% stake in Epic Games for $330 million in 2012.

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Impact: This deal was clearly not a surprise. Tencent has openly been in the market for strategic high-profile acquisitions and we mainly see this one as a way for them to further expand into North America and Europe. Tencent has struggled to grow outside of Asia, especially with mobile games, and Supercell is the leading provider of high-end mobile games in Western markets.

For the short term, Tencent is in the enviable position of owning the leading PC game with League of Legends, and now is bringing the leading global mobile game in Clash of Clans into the fold. On top of League of Legends, Clash of Clans has the potential to really expand Tencent’s audience in North America and Europe. Conversely, the Riot acquisition really allowed League of Legends to thrive in China. Growth in China could be the biggest opportunity for Supercell products because Tencent is of course a major operator in China. The firm is huge in China-based online communications with QQ, Weixin/ WeChat and social network Qzone.

Softbank ends up making a tidy profit on its Supercell investment after five years but that was not the genesis for getting rid of the studio. With a debt of $62 billion on the books, driven by the disastrous Sprint acquisition when SoftBank took a 72% stake for $21.6 billion, the firm really has no choice in divesting some of its prime subsidiaries. This is especially true given the company is showing every indication of standing by Sprint as efforts are made to turn the mobile phone carrier around – even upping its ownership to 80% as of August last year. Only last month, SoftBank sold $7.9 billion worth of its shares in Chinese online retailer Alibaba Group Holding Ltd., and a week later generated another $685 million by selling most of its shares in Gungho Online Entertainment back to the mobile game company.

Tencent's headquarters in Shenzhen.

Tencent’s headquarters in Shenzhen.

The burning question is did Tencent purchase Supercell at its peak? The $10.2 billion valuation really depends on whether Clash of Clans can continue its momentum, and Supercell can follow up with equally successful IP. DFC’s concern is that the mobile game space is showing some signs of plateauing and Supercell products can tend towards the grind-heavy model that can often result in consumer fatigue. Consumer fatigue with mobile freemium games is a real concern in terms of long-term potential. If Supercell can overcome those issues and continue to churn out revenue producing products they are clearly worth it.