Playtika sells controlling stake: is mobile gaming undervalued?

Axios reports that Joffre, a tech-focused buyout fund, has agreed to acquire a controlling stake in mobile games publisher Playtika for $21 per share, representing a 46% premium on Playtika’s close price yesterday. This news is not altogether surprising given that Playtika announced back in February that it was exploring a potential sale, among other possible strategic options. Playtika, which is headquartered in Israel, went public in January of last year with a debut share price of $27, valuing the company at more than $11BN. The company’s shares closed at $14.53 last Friday but had traded as low as $11.57 within the last 90 days. Playtika’s share price rose more than 30% in after-hours trading on news of the transaction. Edit: other outlets are now reporting that Joffre will take a 20% controlling stake, not a majority stake as Axios reported. This article has been edited to reflect that.

Playtika’s share price fell precipitously after the company reported Q3 2021 earnings in October and has trended downward ever since. This decline is likely due to perceived pressures on the firm’s growth resulting from Apple’s App Tracking Transparency (ATT) privacy policy, which rendered new user acquisition more difficult. But perhaps more acutely painful for Playtika was ATT’s impact on re-engagement campaigns, or ad campaigns designed to reactive lapsed or inactive users. Playtika’s legacy catalog of social casino games features a deep well of dormant players; Playtika is generally seen as one of the industry’s leading performance marketing operators and has highlighted the prominent role that re-engagement campaigns (sometimes referred to as “retargeting”) play in its success, going so far as to specifically emphasize the power of retargeting campaigns in its S1. (I outline the strategy behind retargeting campaigns in this post.)

But re-engagement campaigns rely on targeting devices via their advertising identifiers and are therefore mostly non-viable on iOS in the post-ATT environment. Further, Playtika runs a large development office in Ukraine that has obviously been impacted by the ongoing war there, and general economic weakness has created frictions across the entirety of consumer tech. Playtika announced layoffs across a number of its global studios earlier this month.

As I detail in Surviving the mobile marketing winter, the confluence of ATT, a COVID overhang that confounds advertising campaign targeting and bid models, and economic softness has engendered potent headwinds for mobile marketers. And because mobile gaming largely didn’t exist during the 2008 global financial crisis, no historical prototype exists for the well-being of the category in a recession. As I write in What happens to free-to-play mobile gaming during a recession?:

Mobile games are mostly free: they are the ultimate discount entertainment. But my belief is that, while free-to-play games may also serve as a substitute good — to all forms of entertainment, including traditional console video games — the digital products purchased via IAPs in free-to-play games need to be classified independently from the games in which they exist. The decision a consumer makes to download a free game is totally separate from the decision they make to purchase a digital good in that game. Putting aside design factors (“pay to win,” etc.), it’s tautologically true that free-to-play games can be played for free, and so IAPs have to be seen as luxury goods: characterized by desire and convenience, with demand tracking income.

Playtika might be acutely susceptible to these three factors given the composition of its games portfolio, although the company has diversified away from the social casino gaming genre in recent years through a spate of M&A, including the acquisition of a former employer of mine. But Playtika is not uniquely susceptible to them, and the pace and deal volume of M&A remains frenzied across the entirety of gaming. I hypothesized that ATT would catalyze a flurry of M&A activity in this piece from 2020.

Are large, diversified mobile gaming publishers being undervalued in the current environment? I believe they are, for two reasons:

  • The uncertainty surrounding the resilience of mobile gaming in an economic downturn, given that the category has never weathered one, adversely impacts transaction prices disproportionately to the general weight of a recession. If free-to-play games do resemble luxury goods, as I consider in the above-linked piece, then the category’s rebound will outpace that of the broader economy in a recovery;
  • ATT presents systemic market shocks and barriers to growth for mobile gaming publishers in the medium term, but these limitations can be surmounted with new advertising infrastructure. For instance, Apple recently announced an updated version of its advertising measurement framework, SKAdNetwork, which represents a powerful, fundamental improvement over what is available now. New methodologies will come to market over the next few years that dramatically improve the user acquisition capabilities of mobile gaming studios relative to the current, post-ATT standard. The pain of ATT is sharp and will persist for some time, but it can be ameliorated, especially by large, integrated publishers.

The mobile marketing winter represents a reasonably prolonged (2+ years) systemic disturbance that requires total infrastructure redevelopment and product recalibration to navigate successfully. This is an extraordinarily fraught situation for a category as fast-moving and dynamic as mobile gaming to face: product development cycles are generally short (<18 months), genre innovation is frenetic, and hit titles can reliably generate hundreds of millions of dollars per year on an extended timeline. The mobile marketing winter simply invites consolidation and recapitalization in mobile gaming.

Photo by Tamanna Rumee on Unsplash