First To The Finish Line: EA and Take-Two Interactive race to complete the acquisition of Codemasters

December 21, 2020

2 min read

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What's going on here?

UK based gaming company Codemasters, founded in 1986, has accepted a last-minute bid from EA valuing the company at $1.2 billion.

What does this mean?

Codemasters is most famous for titles such as Dirt, Formula 1 and Grid. Codemasters initially accepted a bid offer from Take-Two Interactive (TTI) – famous for its NBA2K series-  valuing the company at $759m. The offer initially came in at a 38.6% premium for the shares. After a leak surrounding the deal and shifts in exchange rates, the price subsequently dropped to an 11.5% premium offering on the shares.

This was the situation until a few days ago when EA swooped in with a last-minute deal to buy the company. EA’s bid for Codemasters enters in at $1.2 billion and is reported to be an all cash offering. If the deal goes ahead, EA will have a near monopoly in the racing games sector with competition coming only from Sony’s Gran Turismo and Microsoft’s Forza Motorsport series. Under the deal, the current Chief Executive of Codemasters, Frank Sagnier, and the management team will stay on post-acquisition.

What's the big picture effect?

Three factors merged to make this an opportune moment for EA to bid. The first is the growing trend of consolidation in the industry. For example, Microsoft’s acquisition of Zenimax (owner of Bethesda and hugely successful IPs such as The Elder Scrolls) for $7.5 billion dollars. Other examples include Sony’s purchase of Insomniac (Spiderman) and Epic Games’ acquisition of Psyonix (Rocket League).  Secondly, investors complained that TTI’s initial offer valued the company too low. EA’s offer values Codemasters 14.4% higher than TTI’s offer. Moreover, 3/4 of the offer made by TTI was in stock options. This would have forced several British fund managers to sell their stake in Codemasters making the offer less appealing. Thirdly, there are significant synergies that can be un-leased through the acquisition. Several of EA’s racing IPs have underperformed recently. For example, EA recently shut down its Gothenburg, Sweden studio after three years of developing Need for Speed due to poor sales. Codemasters can provide a new and hugely successful IP while EA can provide a wide infrastructure, an injection of cash and dedicated access to licensing, marketing and publishing expertise.

In addition, this is a significant opportunity for EA to further capitalise on the industry’s stellar growth during the pandemic. End of year growth forecasts predict that industry revenue will have gone up by 20% to $174.9 billion dollars. The acquisition of Codemasters will enable EA to implement their live service model across a wider segment of the racing fanbase. The live service model allows EA to spread development costs because expansion packs and season passes can bring in new content throughout the year. Additionally, the combination of microtransactions and a dedicated fan-base ensures a steady stream of income throughout the year rather than just at the point of purchase. The fact that Codemasters’ shares are currently trading above EA’s offer suggests that investors expect the bidding war to continue as both companies seek to utilise this opportunity.

Report written by Andri Boda

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