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Analysts weigh in on Tencent's $8.6 billion purchase of Supercell

We asked industry analysts for their take on Tencent's purchase of an 84.3 percent share of Supercell's stock for $8.6 billion.

The Chinese internet giant Tencent has invested in Activision Blizzard, has a stake in Epic Games, and completed purchase of League of Legends creator Riot Games late last year. Now they have made what may be an even more momentous deal--the company has purchased an 84 percent stake in Finnish mobile game powerhouse Supercell for $8.6 billion.

This is literally a big deal. Game intelligence firm Newzoo states that the combined Tencent/Supercell instantly becomes the top public company by game revenue in the world, and predicts that the two will take 13 percent of this year's global games market--around $13 billion.

What does the deal mean for the two companies? We rounded up opinions from some the most insightful industry analysts around.

What is your initial reaction to this deal?

This is good news for Finland. Supercell turned out to be worth more than Nokia. In 2010 I expected Angry Birds to become bigger than Nokia, but it turns out I was off on the company but right on the space. - Horace Dediu, Asymco

This is certainly a good deal for Tencent. It solves a huge strategic problem and provides immediate additional revenue potential. This year, Supercell is on track to make over $2 billion outside of Asia. This is significantly more than the $1.3 billion Tencent made outside of Asia last year, the majority of which came from League of Legends. Tencent will now finally make serious mobile revenues outside of its home turf. - Peter Warman, CEO of Newzoo

This was clearly not a surprise.  Tencent was clearly in the market and we mainly see it as a way for Tencent to expand into North America and Europe.  Tencent has struggled to grow outside of Asia and Supercell is the leading provider of high-end mobile games in Western markets.  The question is did Tencent purchase Supercell at its peak? - David Cole,  CEO of DFC Intelligence

The fact that Tencent would be interested in Supercell is hardly surprising. It was more surprising that Softbank would look to sell its shares in Supercell. Their collaboration seemed to be a successful one, but it follows a change of direction for Softbank recently. They have recently sold back most their share in GungHo, who was part of the initial deal when Softbank acquired stakes in Supercell.  - Thomas Bidaux, CEO at Ico Partners

SoftBank really seems to be keen to exit the gaming business. After selling off almost all shares in GungHo Online Entertainment, now this. If they are not interested in holding a stake in a studio like Supercell, which other studio should they even look at then? There seems to be significant pressure to liquidate assets within SoftBank, otherwise it's hard to imagine why they let go of a cash-printing machine like Supercell. - Serkan Toto, CEO of Kantan Games

It was great timing for SoftBank to unload the company. They’ve been scuffling for a few years and appear to have needed the cash. Supercell is arguably at an all-time high in terms of valuation since Clash of Clans has been a giant in the mobile games space for years but is starting to fade - and Supercell seems to have a new hit property on their hands with Clash Royale that’s just starting to ramp what could be a multiyear run near the top of the grossing charts. Plus, I wouldn’t be surprised to learn that Supercell’s got some other interesting properties in the pipeline that seem exciting. Add all that up and you’ve got an excellent case to make to would-be suitors. Tencent hasn’t been shy about making big gaming bets outside of China in recent years so it’s not out of character for them either. - Lewis Ward, research director for gaming at IDC

Is Supercell really worth $10.2 billion?

Seems cheap to me. It values them at around 7x operating profit, and they are growing. That's pretty cheap, given that Twitter trades at 10x. - Michael Pachter, managing director, Equity Research at Wedbush Securities

On sales of US$2.4 billion and income of well over US$900 million last year, Supercell is not only extremely profitable but managed to scale to become one of the biggest developers on the planet - including the PC and console. Get this: Supercell is making more profit, on an absolute and relative basis, than Nintendo (whose market cap is around US$20 billion right now). It's not only about current numbers, however. Tencent seems to think that there is also potential to be unlocked in the future, and of course deals like this are not always about money only. - Serkan Toto

The valuation really depends on whether Supercell can continue its momentum.  DFC’s concern is that the mobile game space is showing some signs of peaking 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 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. - David Cole

Supercell has been able to prove that they can build massive hits on mobile, multiple times, with a team of a reasonable size compared to other similar companies in the sector (190 persons per Ilkka's blog post). With reported revenues of $2bn in 2015, the $10.2bn figure, while considerable, doesn't sound completely insane. Then, you consider the synergies Supercell has with Tencent and its portfolio of companies, and you can imagine the Chinese corporation betting for even larger figures for the years to come. - Thomas Bidaux

What does this deal have the potential to do for Tencent?

This gives Tencent the leading PC game with League of Legends and now the leading mobile games.  It has the potential to really expand their audience in North America and Europe. - David Cole

Clash of Clans is huge in China already and I suspect Clash Royale is making some inroads there too. So, first, it’s a good fit domestically for Tencent’s portfolio. Tencent also wants to break further into Western markets, so this acquisition gives them instant global cachet from a mobile standpoint. I suspect Tencent is now be positioned to leverage Supercell’s expertise to help them successfully launch titles in the West that are currently only known in China. - Lewis Ward

Clearly there is a land grab for engagement. It used to be “eyeballs” or “accounts” but the most valuable commodity today is engagement and media and internet companies are seeking assets that possess high quality and quantity of engagement. - Horace Dediu

Tencent is, apart from its investments and a few test balloons here and there, almost a nobody in Western markets like the US or Europe, for example. On mobile in particular, the company's brand power or clout stands at practically zero in these countries, at least from an end user or revenue perspective. It's very similar in Asia's top countries outside Japan, Korea and China where Tencent might command significant respect in the industry but hasn't gained a foothold on the consumer side so far. The Supercell deal changes everything for Tencent: they will (and should) keep the Supercell brand, but now the company finally enter markets where it used to play almost no role. - Serkan Toto

The deal buys Supercell a massive presence on the global mobile game market. The company is already very strong in China, and now, it can boast a worldwide presence in that field. Don't get me wrong, I don't expect Tencent to start cross-promoting its Chinese titles in the Clash games. But with a large warchest, and 4 incontestable blockbusters on mobile, Tencent can maintain and develop Supercell's lead for a long time. On the technology side, I don't think you can underestimate how impressive Supercell is, and what they have managed to achieve on their scale. I think it is easy to forget, because they make it look smooth and make you forget about it, but I am in awe of the Clash Royale matchmaking system for instance. I imagine Tencent has some concrete use for this kind of technical excellence as they also operate at humongous scales. - Thomas Bidaux

The different parts of the games industry are growing (or shrinking) at different rates driven by changing user behavior and spending. In our games report, we forecast mobile games growth of 8.1% CAGR to reach $48 billion by 2020, MMO/MOBA games growth to $30B by 2020 at only 5.2% CAGR, with standalone console/PC games software declining to $21 billion by 2020 at -3.8% CAGR. So it makes as much sense for Tencent to buy Supercell as for Activision-Blizzard to buy King Digital. In each case the buyer is rebalancing their business with more exposure to the largest of the games growth markets. That said, the highest growth markets from a small base are VR/AR games to $10 billion by 2020, plus eSports at a smaller scale. More large scale consolidation could follow. - Tim Merel, founder & CEO of Eyetouch Reality and Digi-Capital

What will this allow Supercell to do that it wasn't already doing?

I doubt Supercell had much of a say in the matter. At least they’re now part of a conglomerate with deep gaming roots. Hopefully there won’t be too much of a culture clash though. I suppose Supercell has an even bigger marketing war chest to draw upon if they need it and is much better positioned to monetize their portfolio in China. It’s probably only a matter of time before a movie based in the Clash of Clans universe is announced! - Lewis Ward

I think Tencent should be able to help Supercell crack the China market, and for Tencent, the deal not only increases the size and scale of its gaming business, but also establishes a stronger position in the mobile game market. - Colin Sebastian, analyst with Robert W. Baird & Co. Incorporated

The Tencent acquisition of Riot really allowed League of Legends to thrive in China and I think this will be the biggest opportunity for Supercell products because having a really invested operator in China like Tencent makes a huge difference. - David Cole

It means no change for Supercell, other than a pretty strong partner in the largest market in the world. I am sure that they do well in China, but think that they will do better now that Tencent has so much invested.  Supercell still owns 14 percent. The deal was done to allow employees to monetize and become financially secure. - Michael Pachter

The immediate opportunity comes from  the Android ecosystem in China, representing around two-thirds of the Chinese mobile market. Clash Royale is one of the best performing games on iOS in China and has just recently launched on Android in the third-biggest store in China: 360 Mobile Assistant. Tencent’s MyApp store is the biggest. Though it is not written in stone yet that Kunlun will no longer publish Supercell games, it seems obvious that Tencent will take over. Using Tencent’s store and QQ community represents an immediate $1 billion+ opportunity for Supercell’s portfolio in China, particularly Clash Royale- Peter Warman, CEO of Newzoo

Supercell inherits a parent that cares a lot more about games than its previous one. After the initial partnership and the collaboration with GungHo, I am not sure how much Supercell benefited from the support of Softbank. Tencent is a lot more aligned with them and that's already a lot the studio.
It also strengthen them in Asia. If they had been acquired by a Western company, I can imagine them losing some of their global advantage over time. In the Supercell blog post, there is a mention made to Riot Games and the respect Supercell has for them. I can imagine that's another concrete perk, giving them access to the leading eSports company at the moment, just as they are building Clash Royale as a competitive game on mobile. - Thomas Bidaux

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