Tencent shifts focus to majority deals, overseas gaming assets for growth-sources

Content of the article

HONG KONG – Tencent is resetting its M&A strategy to focus more on buying majority stakes, mainly in overseas gaming companies, as the tech giant plans global expansion to offset slowing growth at home in China, people with direct knowledge of the matter said.

Tencent Holding Ltd has invested in hundreds of startups over the years, mostly in the onshore market. It has typically acquired minority stakes and remained invested as a passive financial investor.

Content of the article

However, it is now aggressively seeking to own majority or even controlling stakes in foreign targets, particularly gaming assets in Europe, the four people with direct knowledge of the matter told Reuters.

Content of the article

The change comes as the world’s number one games company by revenue counts on global markets for future growth, which requires a strong portfolio of top-tier games, the sources said.

Tencent’s new strategy signals how China’s tech titans are seeking to emerge from the regulatory shadows after two years of crackdown and uncertainty weighed on their sales at home and led to a massive sell-off in their shares.

Aside from the core gaming sector, Tencent is also looking to acquire global assets, particularly in Europe, related to the so-called metaverse, said one of the sources and another source with direct knowledge of the matter.

The people declined to be identified because the information was private.

Content of the article

Tencent told Reuters the company had been investing overseas for a long time, “long before any new regulations” in China. It looks for “innovative companies with talented management teams” and gives them room to grow independently, the company added, without elaborating.

Tencent’s quest for bigger stakes in gaming companies comes as other tech giants such as Microsoft, Sony and Amazon are acquiring gaming assets and related intellectual property, three of the sources said.

Tencent Chief Strategy Officer James Mitchell said in a post-earnings call in August that the company would continue to be active in acquiring new overseas game studios.

“In terms of the games business, our strategy is … to focus on developing our capabilities, especially in the international market,” he said. “We will continue to be very active in terms of acquiring new game studios outside of China.”

Content of the article

WE ARE LOOKING FOR BIGGER BET

Tencent’s growing focus on overseas assets and markets contrasts with its much slower pace of trading at home since regulatory restrictions intensified and the divestment of a group of domestic portfolio companies.

From 2015 to 2020, the owner of China’s number one messaging app WeChat made 150 investments at home totaling $75 billion, compared to 102 deals worth $33 billion in overseas markets , according to data from Refinitiv.

Tencent reported its first quarterly top-line decline in August, hurt in part by a lack of game approvals in China and regulations limiting play time. Online gaming revenue declined 1% both at home and abroad.

Its Hong Kong-listed shares have plunged 60% in the past two years.

Content of the article

Against that backdrop, Tencent has barely made any investments in China this year compared to 27 deals worth $3 billion overseas, Refinitiv data shows. It has been shrinking its portfolio in part to placate regulators and also to make big profits, sources told Reuters.

“We believe Tencent will continue to make reasonable investments to acquire quality game content and talent and deepen partnerships with top-tier studios around the world to increase its investments and presence in overseas markets,” Citi analysts said in a report at the beginning of September.

Tencent’s pursuit of larger stakes in its existing game portfolio or new targets would give the company greater leverage over those companies’ businesses and also help it secure intellectual property rights to popular games , the four sources said.

Content of the article

Also, with Beijing strictly restricting home game approvals and still suspending approvals for foreign IP games, Tencent is forced to move towards gaining control of foreign game companies and their IPs, they say the four sources.

In September, Tencent increased its stake in Ubisoft in a deal that made the Chinese company the largest shareholder in the leading French game developer, with an 11% stake that can be increased to 17%.

REGIONAL CENTER

The Ubisoft deal comes just after Tencent acquired Sybo Games, the Copenhagen-based developer of the hit mobile game Subway Surfer, in June and took a 16.25% stake in the developer in August Japanese “Elden Ring” FromSoftware.

Last year, Tencent said it would take over British video game developer Sumo in a $1.3 billion deal, one of its biggest overseas transactions since the regulatory crackdown in late 2020.

Content of the article

In Europe, aside from its purchase of a majority stake in “Clash of Clans” mobile game maker Supercell for $8.6 billion in 2016, Tencent has for years cut mostly minority deals, including buying 9 percent of the firm British games company Frontier Developments.

Elsewhere, Tencent is also looking to increase its investment and make deeper inroads into Southeast Asia as it sees the region, home to 650 million people, as having the potential to replicate the success of the Internet boom in China, two of the sources said.

China’s largest social media company already has a regional hub for Southeast Asia in Singapore that houses its international game publishing business.

Since last year, the company has repeatedly stressed that it aims for half of its gaming revenue to come from outside China, up from about 25% now. In doing so, it launched a new publishing brand called Level Infinite in Singapore in December. (Reporting by Julie Zhu and Josh Ye; Editing by Sumeet Chatterjee and Kim Coghill)