The Euro Vision: EA's Ubisoft Dilemma

It's now over two years since EA bought a 20 percent stake in Ubisoft, but after considering recent financial results from both companies, as well as mobile publisher Gameloft, Euro Vision columnist Jon Jordan reckons the denouement remains no clearer. "Everyone loves getting something for nothing, even the folks at EA who this week have happily banked another $75 million just because it owns 19.9 percent of Ubisoft; a company whose share price is currently at a five year high. Putting that figure in context, it's only $1 million less than EA paid to buy MMOG publisher Mythic last year. Officially, the good news was tucked away towards the back of EA's quarterly 10-Q filing for the US Securities and Exchange Commission. "Marketable equity securities increased to $235 million as of December 31, 2006 from $160 million as of March 31, 2006, due to an increase in the fair value of our investment in Ubisoft Entertainment," it stated. It's not bad going considering as its Ubisoft stake accounts for the vast majority of EA's marketable equity securities, and it only paid $90 million for it in the first place. Nice work if you can get it. But as mentioned on previous occasions in The Euro Vision, the continuing shotgun engagement of North America's biggest publisher with Europe's second biggest publisher remains one of the industry's unresolved dilemmas. Even assuming EA's decision back in December 2004 was nothing more than a defensive move to stop any non-gaming rivals gaining a stake in Ubisoft - or a "strategic investment" as chairman and CEO Larry F. Probst III put it at the time - EA is demonstrating a reluctance to reveal its future plans. Clearly, there can only be two longterm solutions - a total buy-out by EA or a buy-back of its shares by Ubisoft and/or friendly financial institutions. The problem in either case is Ubisoft's stellar performance since the EA investment. That's making the buy-out decision an expensive one for EA. Ubisoft's current market capitalization is €1.3 billion ($1.7 billion), although with EA's $2.4 billion in cash and short-term equivalents plus the option to raise extra outside investment it's certainly not impossible. Equally, finding a friendly bank prepared to invest (or loan) $235 million plus EA's premium would create another set of headaches for Ubisoft, ones potentially even worst than its current sleeping partner. So until one company decides to get ambitious, the result will remain the status quo. Happy Holidays This being the reporting season for Christmas financials, it hasn't just been EA which has been lifting its financial skirts and showing a bit of ankle. As expected, Ubisoft's figures were impressive - hence the strength of its shares. Sales for the three months September to December were up 24 percent year-on-year to €311 million ($404 million), which was €31 million ($40 million) more than expected. Significantly, this wasn't just due to the better-than-expected performance of next gen games such as the latest Rainbow Six and Splinter Cell titles, but was spread through mass market games such as Pirates of the Caribbean 2 and Dogz, as well as general back catalog sales. For this reason, full year predictions for FY06-07 and FY07-08 have been raised to over €600 million ($780 million) and over €750 million ($974 million) respectively. Perhaps more significantly, operating income before stock options is now expected to be €24 million ($31 million) and €60 million ($78 million). Ubisoft is also aggressively pushing forward to reduce its debt. It now plans to redeem outstanding bonds two years ahead of schedule. This will reduced its planned debt from €65 million at the end of March to zero, saving an extra €2.5 million ($3.2 million) in repayments. Collect 'Em All Throwing more intrigue into the EA-Ubisoft mix is the French publisher's stake in mobile game company Gameloft. Combining the personal ownership of Ubisoft's founders, the Guillemot brothers, peripherals manufacture Guillemot (itself majority-owned by the brothers), and Ubisoft (which is the largest single stakeholder at 19.3 percent), 41 percent of Gameloft is thus controlled. And like Ubisoft, Gameloft is having its best year ever. It claims to be the leading mobile gaming company in Europe and the second largest player in the North American market. Full year sales were up 46 percent to €68.4 million ($89 million), with final quarter sales contributing €21.8 million ($28 million), up 41 percent year-on-year. This is interesting as thanks to EA's $680 million purchase of mobile games publisher Jamdat in late 2005, we can directly compare sales figures. During the same quarter EA Mobile sold $35 million-worth of mobile games. And maybe it's this which could eventually tip the balance for EA. If mobile gaming grows as quickly as some analysts predict, a bid for Ubisoft could also be rolled up with one for Gameloft; a process which would be expensive, and messy to structure and manage, but one with enormous synergetic upsides. Money Makes The World Go Round The final French publisher currently making waves is Europe's biggest, Vivendi Games. Its full year results were up 25 percent to €804 million ($1.04 billion). Of course, the key factor in this was World of Warcraft. It's significant to notice however, that despite urban myths to the contrary, Blizzard's behemoth itself isn't close to being a one billion dollar a year business, as those figures also include sales of Vivendi's traditional games such as Scarface, Ice Age 2 and The Legend of Spyro. Indeed in 2005, Vivendi reported online games 'only' accounted for 49 percent of overall revenue. That would tag World of Warcraft-related revenues for that year at around €310 million ($402 million). This proportionally and absolutely will be much higher for FY06 but clearly it won't account for the whole $1 billion. The magic number could be broken in FY2007, but probably only if you include sales of The Burning Crusade expansion pack; and in my book that's cheating. More interesting though is the impact on overall profitability of the World of Warcraft business. Vivendi Games' operating income in FY2005 was around 6 percent of revenue (€41 million / $53 million). It was expected to jump to between 8 to 10 percent in FY2006, although Vivendi is yet to confirm those figures. If fulfilled however, that would see operating income of between €64 million ($83 million) and €80 million ($104 million). As a margin, this is better than most publishers who don't have large online divisions, but perhaps not as impressive as the sheer scale of having eight million plus subscribers might at first make you believe." [Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He's due a friendly takeover.]