For the fiscal year ended 3/31/23 the Embracer Group (EMBRAC-B.ST) saw sales grow 121% to SEK 37,665 million (about $3.5 billion). The growth was driven by major acquisitions the company made during the year. Organic growth was 2% for the fiscal year and -4% in the fourth quarter.
The company also announced that they received indications that a major partnership they were working on looked like it might not materialize. Embracer lowered its EBIT forecast for fiscal 2024 as several products are being delayed to fiscal 2025.
Analysis
The Embracer Group has definitely been a deal maker in recent years. Much of the focus has been on acquiring IP that can be used across entertainment categories in a transmedia strategy. Embracer’s biggest acquisition was actually in tabletop games when it acquired the board game company Asmodee for $3 billion.
Board games now account for almost as much revenue for Embracer as PC and console video games (about $1.2 billion each). The other major recent acquisition for Embracer was buying Eidos/Crystal Dynamics from Square Enix. This added more classic video game IP like Tomb Raider. Embracer also acquired IP rights to some Lord of the Rings work via its acquisition of Middle-Earth Enterprises in August 2022.
The latest financial release was interesting because it focused on a potential strategic partnership that fell through at the last minute. Based on the language in the release the deal falling through was unexpected. It also appears that Embracer was dependent on the deal because it “would have enabled a catch-up payment at closing for already capitalized costs for a range of large-budget games, but also notably improved medium-to-long-term profit and cash flow predictability for the duration of the game development projects.”
The quarterly investor presentation was painful to watch. Investor reaction was swift and harsh. Overnight Embracer stock fell 44%. The fact that the company stated several notable games would be delayed into fiscal 2025 only added fuel to the fire. In the past year, Embracer stock has declined 75%.
From DFC’s perspective not much has changed in our analysis. The Embracer Group was not included in the DFC Intelligence Video Game Stock Portfolio because we are skeptical about the chances of successful integration of the diverse properties the company now owns. Buying IP is the easy part. The hard part is figuring out how to make it profitable. Right now, execution is a major question mark.
The collapse of the recent partnership deal is a sign that potential partners are concerned about Embracer’s ability to execute. What is more concerning is how much emphasis Embracer was putting on the deal going through. In its November 2022 interim financial report, Embracer put an emphasis on this deal in what they called a “transformative partnership and licensing deal.”
In the current environment potential partners and investors are taking a closer look under the hood of companies. Embracer will require a great deal of work if it is to be successful. There is a chance the company will not survive in its current form and be forced to sell off some or all of its assets. The good news for investors is that the holdings of Embracer may be worth more individually than they are as a whole.
