Modern Times Group MTG AB (MTGB) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this conference call regarding MTG's sale of ESL Gaming. My name is Lars Torstensson, and together with me today, I have our CEO, Maria Redin; and our EVP, Esports and Gaming, Arnd Benninghoff. But with that said, I would like to hand over immediately to Maria Redin to go through this great deal. So over to you, Maria.

Thank you, Lars, and good morning, everyone. We are, of course, extremely excited to walk you through yesterday's announced transaction and then also briefly talk to you about the next entity, the pure-play gaming company. So let's start with a high level of the transaction, which really marks a milestone for MTG, and it has created first esport unicorn. We've been -- for quite some time, been outspoken about our belief in B2C, the relevance of really building an end-to-end competitive gaming platform and that we are exploring both organic and inorganic opportunities to achieve this. We're, of course, therefore, excited and proud that we're enabling the merger between ESL and FACEIT and also subsequently sale to the Savvy Gaming Group. It is a transformative transaction for the industry. It's a highly value-accretive transaction for our shareholders, and it is an accelerator for our gaming strategy. For the community, this unlocks new opportunities as we are creating a leading end-to-end competitive gaming platform. It's going to be backed by Savvy Gaming, who is a firm believer in the strategy and the industry as a whole, which was extremely important for us as we decided to form this transaction. For MTG and our shareholders, it does crystallize the value of our esport assets. It provides them a 2.5x return on the investment. We've been a proud owner for over 7 years, and the return on the investment is based on an EBIT just over $1 billion. The net proceed will distribute at least 40% back to our shareholders, while the remaining funds will be used to accelerate our buy and build strategy in the gaming vertical. And before we go through the specifics of the deal, let me just walk you through the journey of our ownership of ESL and what's been leading up to today's announcement. If you look at the slide, we are now 7 years into our ownership of ESL and DreamHack. We invested already back in 2015, which was then way before the [ hype ]. And that means that we were also early in identifying the relevance and the importance of esports as a mean of entertainment and engagement. This has provided us access to the leading asset at that point in time when we invested, and we have ever since been working closely and supported the management to really build the company that is today the global leading independent esports company. If you look at this journey, what we, together with the management team, really ensured is a global footprint through our geo roll-ups across the world; commercialization through establishing a new league, teams and audience measurement structure to make sure we can properly monetize the eyeballs that we reach; onboarding of Tier 1 global brand partners, which means partners outside also the endemic brands, which is bringing esports mainstream; and last but not least, something we've spoken quite a lot about, the product extension, which means that including broader publishing partnership, moving into mobile leagues, which we've now rolled out on a global basis during this year, and acceleration of B2C. If you take all of this combined and also bring it together with the learnings we've had from the ongoing pandemic, all this has really led up in our own belief in the relevance and the importance of an end-to-end integrated competitive gaming platform, which also then led us to the merger discussions to create the ESL FACEIT Group and subsequent sale to Savvy. And if we are looking at the next slide, so the journey we have had with ESL, what has it actually meant when you look at the core metrics? And if you look at this chart, on all accounts, ESL has really had a tremendous journey. As always, the most important indicators, hours watched and unique viewers, have increased threefold and doubled, respectively, over this journey, which really shows the massive interest and engagement that we have around our products. This interest have, of course, been a key driver of growth of our number of partnership, which in their turn has, of course, been a key driver of our revenue growth. Today, we have close to 100 partnership, and that is an amazing journey from where we started with around 30. And if you look at the revenues, despite being negatively impacted by COVID, which everyone is aware of, we still see a threefold growth here. And moving to the next slide then. I mean of course, the [ extent ] of the ESL numbers are really great. But what is making the numbers even more interesting is, of course, when you look at them in the context of the merger and what this combination enables, when you put together the leading esports and competitive gaming company, which will have a total reach together of over 225 million fans. As I said before, we have for quite some time been outspoken about our belief in B2C and the relevance of building an end-to-end competitive gaming platform and that we have been exploring strategic opportunities. On the inorganic side, we have known FACEIT for quite some time. And as we discussed with them as with some of our partners, it became clear that in discussions with FACEIT, we share both the vision of industry consolidation and also really the desire to create and build the #1 end-to-end competitive gaming platform. And that's why FACEIT became our preferred partner. Together, the ESL and FACEIT Group will become the destination for gamers, audiences and partners looking to reach the digital generation. With a combined reach and the game integrations, they will provide both increased relevance but also engagement and entertainment to all the stakeholders in the industry. If I look forward, part of being a good owner is to know when I can add value support but also when it's time to divest. We are a huge believer in the ESL and FACEIT strategy, but we're also realistic that we may not be able to enable this merger purely on our own. So we now look at the sale to Savvy Gaming Group. We are really enabling the merger, and we are so happy that we also identified a buyer who is long-term committed to the strategy and the industry. And as I said before, this is a key driver for us. And then if you look at the next part, we're also delivering substantial shareholder return as a part of this. We've been a proud owner for 7 years, now we're seeing a return. And on the return, this will partially be paid back to our shareholders and will partially be reinvested to drive accelerated growth in our gaming verticals. And if we then turn our eyes forward, the sale will transform MTG to pure-play gaming company, which means a clear focus and a clear equity story. And we're really happy that we're strengthening our balance sheet through the proceeds of the sale, which means that whilst we're excited about the portfolio and the position we've built now within the last 12 months, this transaction is also a catalyst to accelerate our buy and build strategy in a market that is consolidating. So with that high-level overview, I will then hand over to Lars, who will walk you through the details of the transaction.

Thanks, Maria. And first, I would like to echo Maria's excitement over the deal. We are not just creating the first unicorn of esports but also releasing significant shareholder value. So let me go through some of the basics of the transaction. So first of all, we are selling ESL Gaming to Savvy Gaming Group for a price of $1.050 billion in a 100% cash transaction. As many of you on the conference call are aware, MTG owns 91.46% of ESL Gaming, and that means that the proceeds to MTG amounts to SEK 960 million of the total enterprise value. And that equals then almost 2.5x of what we have invested in the ESL Gaming. Net proceeds for us following the fees and advisory costs that we will be paying will amount to approximately SEK 875 million. And it's important to note this, of course, that the sale of the shares in the esport vertical is exempted from tax. We are expecting that the transaction will be able to close in Q2 2022, but the transaction is also going to be reviewed from a regulatory perspective. All in all, significant shareholder value has been created today, and that leads me to what we're going to do with all the cash that we will receive. Across 2021, we have been investing significantly into our buy and build strategy, creating a much more diversified gaming vertical. And we have, during that period of time, had great support from our shareholders in doing this. So now as we are exiting our esport vertical, we have the possibility of returning cash to our shareholders. And as a result of that, our intention is to distribute at least 40% of the net proceeds received. Just to be clear, our guiding principle for deciding on how we will distribute these proceeds to shareholders is that it should be fair and tax efficient. Provided that the transaction now closes in a timely manner, MTG's Board of Directors intends to propose a structure for the return of the funds to MTG shareholders already in connection with our Annual General Meeting. That will be on the 24th of May 2022. And after the anticipated distribution, MTG will have a net cash position, including full earn-out obligations towards its acquired gaming companies. So by all means, we would have a very strong financial position to accelerate our growth strategy as a pure-play gaming company. And that provides me with a very nice segue over to Arnd, who is going to go through our strategy as a pure-play gaming company. Over to you, Arnd.

Thank you, Lars, and good morning, everyone. Please let me introduce you to the new MTG, which is a pure-play gaming company. We are building a high-quality gaming group around evergreen franchises and highly committed visionary gaming entrepreneurs. And as we already set out back in 2015, pursuing a buy and build strategy where we laid the foundation by acquiring Kongregate and InnoGames, and now over the last 12 months, we've added 3 complementary gaming studios, that's Ninja Kiwi, Hutch and PlaySimple. That's the foundation of our nicely diversified gaming portfolio, spanning from casual to mid-core, mobile-first businesses. We reached more than 30 million monthly active players and have already diversified our revenue stream to 75% in IAP revenues and 25% ad revenues. The environment we've created attracts long-term committed entrepreneurs, based on a clear operating model where we support the entrepreneurs, help them to accelerate their business through centers of excellence across the games critical services, from the analytics to live ops, marketing and UA and even blockchain as a center of excellence. This gives the perfect home and a family model to these entrepreneurs. And together, they share their knowledge, their benefit from the central services and drive the growth in their respective businesses. But we will continue to drive the consolidation of the gaming market where we can find endless number of independent studios in a fragmented market. And through the further acquisitions, we will leverage the operational synergies and reduce the risk of the IPs of game launches. Based on our acceleration platform, we can find many more attractive companies. And we have built up a strong M&A funnel already. After screening more than 3,000 companies over the last years, we enacted discussions with more than 30 targets, which will fit our gaming investment strategy. And the ultimate strategic goal is to create a well-diversified balanced portfolio in terms of revenue streams, in terms of life cycle of the games and [ jaws ]. And as you can see here, we've already established a great portfolio of evergreen franchises from the [indiscernible] fans, Bloons IP, all the way to the strategy games from InnoGames, Forge of Empires. And having said that, I'm happy to hand over to Maria, who will walk you through the stellar performance of our existing games portfolio.

Thank you, Arnd. Well, as I walk you through our ambition in gaming, which is really exciting now as we're building a stronger balance sheet, to Lars' point that we can really accelerate our ambition, I think it's also important to see our starting position. There has been a lot of changes, to Lars' point, the last 12 months, and we're really excited about where we stand today. And the most important, we feel that we're not only a good owner of the asset, and we're also a good finder and architect of a new type of gaming group. So when we look at the combined portfolio, we are at the Q3 year-to-date reporting revenues of SEK 3.5 billion. And the exciting part is that we also outgrew the market with our growth rate of 12% versus market expectations of around 4% whilst keeping our margins intact of around 31%. It is clear that the growth is coming from our newly acquired businesses. We feel very happy, goes without saying, of their performance, and they are delivering in total of 45% year-over-year growth for the first 3 quarters of the year. This means that the newly acquired assets amount to roughly 50% of both our sales and EBITDA. And worth noting as well, based on the EBITDA the last 12 months coming up to Q3, the implied EBITDA multiple paid on these assets is 9.5x, showing that we're not only good at sourcing great assets, which Arnd also showed, but also paying fair valuations, and that gives me comfort as we now move forward with our gaming strategy and becoming a pure-play gaming company. So moving to the last page and to wrap it up before taking your questions, I cannot say enough. I think it's fair to say that we are super excited to announce this transaction. It is the first unicorn in esports. And I think we're enabling a merger that really will transform the industry and provide all stakeholders with a more relevant partner. Through the transaction, which really rendered 2.5x return on the investment, we will realize substantial share of the value creation. This, of course, partially will be returned to our shareholders. So this will also be used to accelerate our ambitions with the gaming side and provide us with a much more forward-leaning position within the industry consolidation. So again, I think the way we look at it is, it is the beginning of a new era. So based on that, we're now ready to take your questions.

[Operator Instructions] Your first question today comes from the line of Oscar Erixon from Carnegie.

This is Oscar from Carnegie. First of all, congratulations on a very, very exciting deal. A few questions from me. First of all, on the regulatory side, what's your view on the approvals needed here? And is there any risk, as you see it, that this does not go through?

Yes. Thank you. On the regulatory side, I think as we set out in the press release, there is -- there are a few countries that where we need to do filings. But the way we look at it and our assessment is closing will take place during Q2, and we feel very comfortable about that.

Great. And on the -- after the distribution to shareholders, do you have any sort of indications on the net debt, net cash position post this deal? And related to that, on the M&A pipeline, you showed a slide there, but are you having very active discussions now, sort of ready to execute on in the first half of the year? Just a few comments there would be interesting.

Yes. No, we don't want to give the precise sort of net cash position post the dividend distribution. But the way when we looked at it, so you understand sort of how much to keep because we do have, and Arnd will talk to you a little bit more about that afterwards, a very interesting M&A pipeline. We also feel that we want to give back to shareholders, and that's the right way to do it, and we tried to strike the balance in between, enabling, of course, a strong position going into a consolidation phase. So we will be even net cash. It will not be a significant net cash, we will still be in a net cash position post the dividend distribution, which would give us a strong starting position to utilize then the full balance sheet and the full sort of [ tool set ] within the capital structure.

And to build on Maria's -- as we are receiving net proceeds of USD 875 million and you also know around how much we're going to distribute, the way when we talk about the net cash position also is us including then total earn-outs that we have committed to in the different gaming companies that we incorporated across 2021 as well. So that is the definition then. So I think that with what you know when it comes to the debt that we carry on our balance sheet and also the obligations that we have booked on our balance sheet with reference to earn-outs, then it should be possible for you to at least have an idea of what our net debt position would be like. And maybe, Arnd, could you take the second part of Oscar's question?

Yes, sure. I mean since 2015, we have built up a strong network of potential targets, companies we are screening, monitoring. If you take Ninja Kiwi, that has been in the making over, I would say, 4 years, 5 years, and then it was just the perfect timing. So we continuously screen the market and as I said, more than 30 companies we are in discussions with. So something definitely will happen in '22. So we just try to find the right timing. And now with the existing companies, we also attract entrepreneurs from their network. So we pursued 2 different type of M&A tracks: one, our roll-ups under the existing studios and then stand-alone acquisitions.

Perfect. That's very helpful. And just a final question for me then, a Board question perhaps, but in your previous structure, you have some long-term incentive costs and central costs, of course, even though it's lower than it has been historically. Any indication here of how much that is -- how much of that is related to esports and whether there are any sort of savings to be made? Although I realize it's still early at this stage, but any indications would be helpful.

Thanks, Oscar, for the question. I'm going to provide you with a clear sign here. As we have been calling for a Capital Markets Day following the close of the transaction, we will then more thoroughly go through the new entity when it comes to the setup -- both when it comes to organizational setup but also, of course, the strategy going forward. So stay with us, Oscar, there. And hopefully, we can provide you with some enlightenment at that time point as well.

Understood. Congratulations again.

Your next question comes from the line of Martin Arnell from DNB Markets.

This is Martin with DNB. I must also congratulate on this deal to start with. My first question is have you received any feedback from Valve as a result of this deal? Have there been any concerns from their side?

Thank you as well. As regards to Valve, I mean, I think these are quite operational topics, which ESL and FACEIT team will actually speak. And I think the way we look at this is that this is an incredible transaction for the industry in which the combination of ESL and FACEIT is going to elevate the product offering and the product proposition to the whole community. So the way we look at this is that it should be super exciting to Valve to be a part of this journey. There is no other way to look at it differently.

Okay. And just -- I don't know if you answered that before, but how do you look at the regulatory process before the deal can be approved?

Yes. I think as we touched upon on the previous question, we anticipate it to close in Q2 and that's based, of course, on our assessment and also the counterpart assessment on the timing that is required from the different jurisdictions that we need to file. And that, of course, gives you a couple of months’ time frame, and we have no reason to believe currently that, that should not hold true.

Okay. So you think it will be a smooth process.

I think so. Well, it's always bold to say it's going to be smooth, but we have no reasons and indications to -- that there's anything else.

Okay. And just on the build and buy strategy in gaming. You were very busy in 2021. Would we expect sort of the same aggressive pace when it comes to acquisitions? Or are you pausing temporarily a little bit and see what is integration of these 3 big companies will lead to this year?

Thanks, Martin. I'm going to ask -- or going to hand that one over to Arnd as well. Arnd, if you could elaborate just on the M&A agenda.

Yes. As you -- just that in '22 this year, focus will be on the center of excellence build-out, leveraging synergies and encouraging the collaboration as there's huge demand. But on the other hand, with the M&A team, we're going to continue the M&A track. And once we've had the right target and it fits into our portfolio, then it's definitely right time then to continue investments. We are not going to [ bot ], so we like to have a really high-quality approach and rather have some entrepreneurs who love to collaborate and benefit from centers of excellence instead of buying too many game studios. But -- so it will be a very selective approach, while we also drive the center of excellence synergies.

Okay. And just on -- when I have you on the line, Arnd, I won't ask you about Q4 specifically and -- but if you look in 2022, what are the prospects for you to return to organic growth in gaming?

I will hand over to Maria since she's given the numbers.

Yes. We don't -- I mean we're still going to come back to our Q4 report, and then we will give you the full update on Q4. So you're going to have to wait a few more weeks, Martin, and then we'll come back to that.

Your next question comes from Tom Singlehurst from Citi.

Yes. It's Tom here from Citi. Congrats on the deal. It's overall a very encouraging number. The question for you is, I mean, it's done now. So on one level, it's academic, but I'm interested in why you're selling it now. Is it just because there was this opportunistic -- the thing I was slightly concerned about is that, potentially, you're not necessarily going to have seen the full benefit of COVID recovery, and so, therefore, maybe selling it too early and it could have been worth more. And then linked to that, I'm interested in the structure of the transaction as well as some clean cash exit makes it a lot easier for us. But interested in why you didn't elect to either retain a small stake in the combined entity or after some deferred consideration? Just a little bit of insight on that would be just useful just to know your thinking.

Yes. It's all fair questions. And I think that we have spent quite a bit of time to think about it on our end to be fair because as I said as well in my presentation, which we believe in the combined ESL and FACEIT Group equity story and strategy. What has been really important for us is, and I think you heard me say that quite a few times, that we believe that it's important we grow in the B2C side and we want to expand our universe from esports into competitive gaming and really be relevant for end-to-end player there. And there are different ways to obtain that. You can either do organic initiatives, and we have been driving some initiatives, or it is inorganic. And I think if you do it inorganic for us, it all comes down to relevance. And of course, to partner up with them with the #1 sort of platform, it makes all the sense in the world. The other question is, of course, how do you enable that? And what kind of resources do we have in order to do so? And what kind of other investment opportunities do we have? And I think that's where it becomes a numbers game and it's all about capital allocation. We've seen the [indiscernible] that we've been a great owner of this asset now for 7 years. With this transaction, we can recognize a 2.5 return for our shareholders. We can distribute that 40% of that net proceeds. And we can enable the business combination, which is really in line with what we have said all along in our strategy. We want to build a more relevant gaming and esports vertical. This transaction enables that, and we didn't feel that we can enable this merger otherwise. And that would have been a massive value loss, we believe. And by realizing them, the investments and the return on the investment, we can then accelerate the opportunities that we have on the gaming side. So the way we look at it, it will just become a win-win. Then you can always say that we could have made a higher return in the years to come, and that could have been so, but I think that then we would have risked this transaction, and I think that would have been lost value. When it comes to the deal, I mean, that is just something you always discuss with a partner, and I think we felt that this was actually the cleanest deal structure. So we're very happy with the deal in its totality, the timing of it and the structure of it.

That's very clear. And then one quick follow-up. I mean you've already sort of really mentioned that the emphasis now is going to be on this sort of pure-play sort of mobile gaming side. Importantly, though, it does feel like the ESL adventure has been a massive validation of your sort of holistic ecosystem approach to gaming. Should we -- I mean is there any chance that you might consider sort of a left field acquisition, creating another new vertical, addressing another part of the ecosystem? Or should we really, really lock you in our minds as a pure-play mobile gaming business from here on in?

I think, a, our legacy with ESL will always stay with us. And I think that -- hopefully, also all the entrepreneurs out there will see with the journey that we've had with ESL and the way we worked with the ESL management team and supported them and stood by them, I think that will resonate with all the future entrepreneurs out there. What we now will focus on is to become a pure-play gaming company. If we will venture out something broader over time, I mean, we likely will come back to you and talk to you about that if and when that is relevant. But for now, you should expect us to remain very focused and build a stronger and more relevant gaming vertical. I think there is great opportunities out there. There is an industry consolidation going out, out there. And I think we want to take an active part of that, and we believe that we have a relevant place to play. But to Arnd's point, we will always remain very selective and focused. And I think when you look at the 3 acquisitions we've done in the last 12 months, I mean that shows the case that we're really good in not just finding great companies but also paying fair valuation and that will become value accretive for our company and the portfolio. So that's what we will do right now.

Your next question comes from the line of Klasman Engberg from Handelsbanken.

I think that's me. Rasmus here with Handelsbanken. Yes. I'm quite familiar with FACEIT, but I don't know their owner group, Savvy Gaming, I mean, if it is already fully financed and so on or is there any sort of things that need to happen for this, I mean, like a loan or some sort of issue or similar things. Can you talk about that group really? Who's backing it?

Yes. Absolutely. It will be done certainly. But I think -- I mean FACEIT is known by the market for a long time, and we've, of course, been closely working with them for quite some time and discussed now the last year in much more close sort of discussions. And Savvy Gaming has actually been around for a time. It has not been around in the shape and form it is now because it's newly created in its existing form, but we've actually been working with the people behind Savvy Gaming now for 22 years on an operational level. And they are funded by the sovereign wealth fund of Saudi, the PIF, which means that they are fully funded. And what excites us in particular is that they are extremely committed to the industry, both esports and the great competitive and sort of gaming community, and they have a long-term vision that will support the ESL and FACEIT. So we're very excited about, a, the transaction; and then b, finding Savvy partners -- Savvy Gaming as a perfect partner.

That was my only question. And I must say, along with everyone else, it's a great deal and I think it's good that you found one niche to focus on.

There are no further questions at this time, sir.

Thank you. That concludes our formal presentation, and we thank everyone participating in today's call, and we look forward to stay in touch. And please remember that we will release our fourth quarter interim report the 7th of February. Thanks very much. Take care. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you. Bye-bye.

Thank you.