Research Summary

The report discusses the challenges faced by Embracer Group, a major video game employer, and its plans to split into three publicly traded entities to unlock value. The report also analyzes the potential of these entities, their financial standing, and the skepticism surrounding the spinoff.

Key Takeaways

Embracer Group’s Struggles and Shift in Strategy

  • Financial Downturn: Embracer Group’s stock fell by 65% over two weeks in May 2023 due to a failed partnership and a significant downward revision to earnings guidance. The company’s stock price is now 83% lower than its peak in May 2021.
  • Shift in Strategy: Embracer has moved from a “revenue growth at any cost” approach to focusing on efficiency and cost savings. This shift was evident when Gearbox Entertainment was sold for $460M to Take-Two Interactive.

Embracer Group’s Split into Three Entities

  • Split Announcement: Embracer Group announced its plan to split into three publicly traded entities: Coffee Stain & Friends, Asmodee Group, and Middle-Earth Enterprises & Friends. The split aims to unlock value through specialized, distinct business strategies.
  • Investor Reaction: Following the announcement, Embracer Group’s shares traded up 18% and nearly doubled by May. However, the stock has since retracted about half of the gain due to skepticism about the spinoff’s ability to unlock value.

Analysis of the Three Entities

  • Asmodee Group: Asmodee is the largest tabletop game manufacturer in the world. Despite being a more stable part of the portfolio, its earnings have been volatile due to the hit-driven nature of the tabletop game industry.
  • Coffee Stain & Friends: This entity will focus on indie and A/AA game development and publishing. Despite being the most interesting company of the three, it might also be the most volatile due to the hit-driven nature of indie games.
  • Middle-Earth Enterprises & Friends: This entity will be responsible for AAA game development and publishing for PC and console. It will have a lower profitability due to high levels of planned investment.

Actionable Insights

  • Monitor Embracer Group’s Progress: Keep an eye on Embracer Group’s progress in implementing its split strategy and the performance of the three new entities.
  • Assess the Impact of Leadership: Evaluate the impact of Lars Wingefors’ leadership on the new entities, given his significant control and the skepticism surrounding his management.
  • Understand the Gaming Industry Dynamics: Gain a deeper understanding of the dynamics of the gaming industry, including the hit-driven nature of the industry and the challenges of AAA game development.

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