[Request] - Embracer Group AB 🇸🇪

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Yes, would like to see this stock too, please.

Embracer Group just announced further acquisitions today, including Middle-Earth Enterprises, giving them the film, board game and videogame rights to The Lord of the Rings and The Hobbit.

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This seems like a Rembrandt in the attic situation after a couple of acquisitions that seem like Marvel/Lucasfilm-style bargains to me and a massive price over-correction leaving the P/E at 6.

$400m got them all LOTR rights except for book publishing and some feature-length film (which they still profit from as Warner are required to continue pumping new titles under the license or risk losing it), as well as long-term partnerships with the likes of Games Workshop and Wizards of the Coast.

Purchasing Eidos’ western assets for $300m is an even bigger steal given they generated around $150m in sales in 2021 and came with the rights to Tomb Raider and Deus Ex.

Even the current enterprise valuation of $4.7b doesn’t seem sufficient for owning the LOTR and Tomb Raider IP.

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After perusing through the annual report I found some interesting things.

  • 2023 income was inflated by almost $500m due to fair value changes in contingent consideration on acquisitions. This is because significant portions of their blockbuster acquisitions like Asmodee and Saber had performance and financial-related provisions. The Gearbox deal alone had $1b in add-ons over six years, with only $540m paid up-front. Rising interest rates and some underperformance in certain studios has meant a boost to Embracer’s bottom line. To be fair this is a financial item which is not included in the company’s operating metrics (pg. 139).

  • Despite the above, amortization of surplus values of acquired intangible assets is excluded from Adjusted EBIT, accounting for around $120m in 2023. This strikes me as slightly aggressive as the increased amortization resulting from Embracer’s acquisitions is not a transactional cost and will continue to be borne by the company. As a result, Embracer’s true adjusted EBIT seems closer to $300m (pg. 134).

  • Interestingly, the acquisition of Asmodee and Dark Horse Comics means Embracer now generates more revenue from physical products than digital ones ($1.8bn to $1.5bn, pg. 134).