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Playtika went public today in an initial public offering at $27 a share, giving the mobile game publisher a valuation of $11.4 billion.

The latest IPO in the game industry will test how much fervor investors have for gaming stocks, as games have prospered during the pandemic as people look for ways to engage in social-distanced fun and distract themselves from reality.

In the offering, Playtika’s owner and the company sold stock valued at $1.88 billion, with Playtika offer 18.5 million shares and its owner, Shi Yuzhu (owner of Giant), selling 50.9 million shares. About $499 million of the amount goes to the company. The IPO is the largest in Israeli history, and the value puts it above American mobile game publisher Zynga, which is worth $10.7 billion. Playtika’s trading opened at $35 a share and it is currently at $33.51 a share. (Update: Playtika’s stock price closed at $31.62 a share, giving the company an enterprise valuation of $14.5 billion).

When it came to public markets, 2020 was an extraordinary year, with 18 video game initial public offerings (IPOs) raising $2.8 billion, according to an analysis by InvestGame, which studies market transactions in the game industry. The big ones were Unity Software, Skillz, and Kakao Games. Other companies have lined up to do IPOs, but the market window is unpredictable. Since gaming is a very small part of the overall stock market, it is vulnerable to swings of the larger market.

In an interview with VentureBeat, Playtika president and chief financial officer Craig Abrahams said the team had to ring the opening bell virtually.

But gaming has been on a roll. Market insight and analytics firm App Annie estimates mobile gaming will grow 20% in 2021 to $120 billion.

The company’s social casino games, including Slotomania and other titles, have generated $2.3 billion in revenues in the past 12 months, but the Israeli company also has $2.3 billion in debt. Sources I’ve interviewed say they aren’t worried about that, as Playtika’s cash flow is more than enough to pay down such debt. Of more concern may be the fact that Playtika has a Chinese owner at a time when U.S.-China relations are sour, and that could spill over into a trade war.

Abrahams said the company looks at debt relative to cash flow. The current leverage is 2.4, where debt is 2.4 times the amount of cash flow.

“The amount of debt is relatively nominal,” he said.

He noted that the company has $400 million or so on its balance sheet, plus the $499 million it raised today, plus $550 million in a line of credit. That gives the money a lot of cash to pursue acquisitions, and Abrahams expects to refinance at better interest rates in the coming months.

Herzliya, Israel-based Playtika will trade under the symbol PLTK. Its value is much higher than in 2016, when a consortium led by China’s Giant Investment Group (through the subsidiary Alpha Frontier) bought Playtika for $4.4 billion. Playtika has more than 35 million monthly active users.

“I have been studying gaming consumers and gaming companies for 25 years and I have followed Playtika for many years, being close to the Israeli gaming business,” said Mike Vorhaus, CEO of Vorhaus Advisors, in an email. “These guys are great game makers and even better marketers/user acquisition kings – they really know how to get the customer to play their game and spend money in the (free to play) games.”

Above: Playtika’s top games

Under the terms of the IPO, Giant owner Shi Yuzhu will still have a controlling stake in Playtika, as his Alpha Frontier is only selling a certain stake to the public.

Playtika’s debt, which matures in 2024, came from big dividends paid to stockholders in 2018 and 2019. Playtika has driven its revenue, which is more than 75% generated in North America, through acquisitions in recent years. Part of the plan is to grow the rest of the world’s revenues in the wake of the IPO. Abrahams said the company will try to do better customer relationship management (CRM) outside of the U.S. and localize its efforts to help build a broader base in the rest of the world.

The company has acquired seven game studios, and seven of its top nine games are owned by the acquired studios. Those top nine games generate 97.6% of revenue. All told, the company has 20 games, and Playtika said it has more titles in the top 100 games than anyone else.

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The central service of the combined company is the Playtika Boost Platform, which provides live operations services and tech to newly acquired studios that can help boost profits and revenues. InvestGame said that from 2017 to 2019, Playtika paid $645 million for its acquisitions.

It paid up to $351 million for the Finland-based puzzle game maker Seriously in 2019. It paid up to $200 million for Austria-based solitaire game maker Supertreat in 2019, and $204 million for Germany’s puzzle game maker Wooga in 2018. During that time, Playtika used its own operating cash to finance deals, and it did not have to raise external money. Wooga’s games saw a 116% increase in quarterly revenue and Supertreat saw a 146.3% increase in quarterly revenue under Playtika ownership. Abrahams noted that Wooga’s June’s Journey was the No. 2 hidden-object game in the world when acquired. Now it’s the No. 1, thanks in part to the Playtika Boost Platform.

In other details, about 80% of the company’s revenue belongs to the mobile platform vs. 20% coming from the web. In-app purchases account for 95% of overall revenue.

Above: Playtika has 35 million daily active users.

Playtika relies heavily on in-app purchases, which account for over 95% of total revenue. Overall, the company has 11.4 million daily active users, or those that come back once a day. Slotomania makes the most money, and it has 1.5 million daily active users.

The company has 3,700 employees, 40% of them working on games. It was founded in 2010 by Robert Antokol and Uri Shahak.

The founders sold it to Caesars Interactive Entertainment in 2011, and then a group led by Giant’s owner acquired it in 2016. Playtika recently had a rebranding, which we wrote about in September, focused on the phrase “infinite ways to play.” Playtika wants to create infinite ways to play its games, which span casual, hardcore, and social casino genres, CMO Nir Korczak said in an interview with GamesBeat at the time.

Public offerings for game companies generated $9.2 billion in value in the first nine months of 2020, according to game investment tracking firm InvestGame.

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For the 12 months ended September 30, Playtika generated $2.29 billion in revenues, $46.1 million in net income, and $815.2 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Risk factors

As for the debt, Playtika described the amount as significant and said “we are a highly leveraged company.” Playtika mentioned this as one of its risk factors. That debt could hurt the company’s capability to raise more capital or fund its operations. The company still has a $350 million line of credit, and it plans to raise that to $550 million. For the past nine months, the company made $93.7 million in principal payments and $139.2 million in interest payments. The interest payments are now higher than they used to be.

It also noted that platform owners such as Apple and Google can decide at any time whether to remove Playtika from its platform. It cited the example of Epic Games, which got in a dispute with Apple and was banned from iOS. The risk of this remains small, but it is interesting that it has become a legal risk factor that is worth mentioning.

The fact that the company has a parent company, and it is controlled by Yuzhu (via his Playtika Holding UK II division), also means that his “ownership of our common stock will prevent you and other stockholders from influencing significant decisions.” His interests may not be the same as those of common stock owners, and Yuzhu will have voting control of the company.

“As long as Yuzhu Shi continues to control shares representing a majority of our voting power, he will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors,” Playtika said in the filing. “In the ordinary course of his business activities, Yuzhu Shi may engage in activities where his interests may not be the same as, or may conflict with, the interests of our other stockholders.”

Abrahams said that the management team has worked for multiple owners and it has done so successfully, and so that bodes well for the alignment between the management team, the owner, and the shareholders.

Above: Playtika’s core services

In another risk factor, Playtika noted that in December 2017, Apple updated its terms of service to require publishers of applications that include “loot boxes” to disclose the odds of receiving each type of item within each loot box to customers prior to purchase. Google similarly updated its terms of service in May 2019. Loot boxes are a commonly used monetization technique in free-to-play mobile games in which a player can acquire a virtual loot box, but the player does not know which virtual item they will receive until they open the loot box.

If platform owners or regulators mandate more changes to the use of loot boxes, Playtika will have to change its games and redesign the economies of its affected games, the company said. That could cause a revenue decline.

In the U.S., the Federal Trade Commission, or FTC, held a public workshop on loot boxes in August 2019. At least one bill has been introduced in the U.S. Senate that would regulate loot boxes in games marketed toward players under the age of 18. The United Kingdom’s Department for Digital, Culture, Media and Sport announced in June 2020 it will launch a call for evidence into the impact of loot boxes on in-game spending and gambling-like behavior. Additional litigation is happening in Belgium and the Netherlands. Efforts are underway in various places to declare loot boxes as illegal gambling.

Abrahams noted that the company doesn’t target children and it is focused on adults, and that mitigates that risk.

Playtika also said that Apple’s decision to retire the Identifier for Advertising (IDFA) may hinder its ability to target users with advertising, resulting in lower monetization of players.

“IDFA is something a lot of people in the industry are talking about,” Abrahams said. “A large percentage of our revenue comes from older cohorts of users. We are less reliant on customer acquisition. We also don’t launch many new games in a given year. So we don’t have a constant need to spend significant dollars on new user acquisition versus re-engaging the existing base. We think we have mitigated this. I agree it’s a risk factor.”

And under the Donald Trump presidency in the U.S., Chinese companies have been under scrutiny; if the same policies continue under the Joe Biden administration, foreign ownership of U.S. companies may be restricted. That could hurt Playtika’s ability to continue its acquisition spree.

Positive notes

Abrahams said the company has five major studios working on new titles. He isn’t predicting when new games will come out. The company has been hiring people, but it generally keeps its veterans teams on the games they create, and then it acquires new teams to launch brand new games.

“We realized M&A was a better way for us to acquire great product teams,” Abrahams said.

Abrahams said the company is investing more in branding and hiring. The IPO will position the company as a global player and it should help it attract more people, he said.

Also on a positive note, Playtika said it has increased average daily payer conversion in its games from 2.1% for the nine months ended September 30, 2019, to 2.5% for the nine months ended September 30, 2020, an increase of 19%. That is, it is making more money per paying user. Abrahams credited the Playtika Boost Platform and the team’s focus in converting non-payers to payers as a healthy way to increase monetization, as opposed to getting current payers to pay more.

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The company plans to use the IPO money for working capital, operating expenses, capital expenditures, and the potential repayment of borrowings. Abrahams said the company starting thinking about the IPO more than a year ago.

“No one expected in January of last year to have the year that we had in the ups and downs of dealing with COVID,” Abrahams said. “We think for the long term and being a public company furthers the foundation to continue that growth.”

Updated: 2:17 p.m. Pacific tie on 1/5/21 with closing price and valuation.

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