Reuters: Sony in talks to buy media powerhouse behind 'Elden Ring', sources say

[mibu no ookami]

I've said for some time Colin was a moron (though for political reasons everyone wanted to assume he knew what he was talking about re: concord).

Colin at best has SOME connections in gaming. That's it. He's not a smart guy nor does he know how most things work.

Anyone who thinks Kadokawa is going for 10 billion dollars has no idea what they're talking about and shouldn't be taken seriously on ANYTHING. It's always a good opportunity to catch some as a complete moron.

I used to listen to this guy Peter Zeihan because I thought he had some interesting insights into Russia and China. I'm not super familiar with the geopolitics of either, but then I caught his videos on EVs... now this is something I know a lot more about. He displayed the same confidence he spoke with on Russia and China despite being entirely wrong. This is when I realized he was a clown and you can't take clowns seriously on ANYTHING, even if they're right a handful of times.

This is why I always stress to people on this forum who want to make predictions to explain their process. Anyone can get a prediction right if you make enough of them.

People with good thought processes can also get predictions wrong, not because the thought process was wrong, but because life is complex. I called Sony buying Kadokawa or FromSoftware and I can show my notes as to WHY that would make sense. I can also say why another company doesn't make sense. But what I don't know is who else is interesting in buying and whether someone is interested in selling unless it is publicly indicated. These are complexities that can and will throw off a prediction.

When part of someone's thought process is that Kadokawa could sell for 10 billion dollars, you know that person doesn't have sound thought processes. Imagine I told you that I could sell my Tesla Model 3 Performance for double the price I bought it for, but I didn't tell you how I came down to that price. Would you take me seriously on anything else? Despite knowing how ridiculous that sounds?

 

[mibu no ookami]

Looks like things cooled down a bit. I hope we hear something soon.

I wouldn't say "things have cooled down." We don't have any idea where in the process they are. We could hear absolutely nothing for the next 3 months and it wouldn't necessarily be alarming.

Standard Due Diligence on a business can run 30-90 days and that's on mid sized businesses. Kadokawa being a larger business could run even longer.

The advantages to suggest that this might happen quicker is that it is a Japanese company looking at another Japanese company. That the target company Kadokawa has been in business for a very long time and that Kadokawa is a publicly traded company helps speed up due diligence, but the idea that we should have heard something within a week of a leak is pretty unreasonable.

That also assume Sony is even in the due diligence phase of this M&A. Kadokawa could still be mulling over accepting the letter of intent. We have no idea the timeline sony put in the LOI for how long the LOI would last.

As I remember it was between $2.5B and $3B, so total acquisition cost of around $5B would make sense. Less if Kadokawa has an important debt (I have no idea if it's the case or not). Maybe a bit more due to Kadokawa's IP.

But I don't see it costing $10B-$15B at all.

Yurinka you continue to disappoint me.

Debt actually makes and M&A more expensive not less. It might reduce the premium, but the overall number is added because you generally have to assume debt. It's also not difficult to look up their debt.

Their IP is captured in the value of their stock price, so no the value of the IP isn't going to increase the price here.

If this reaches 5 billion, you could color me surprised. 4.5 billion is probably the height of this. Depending on the timing of the LOI, you're looking at a market cap as little as 2.3 billion dollars. So to get a premium to take you up as high as 5 billion... is pretty unheard of. And albeit marginal, Sony already owns 2% of the company, so we're still only talking about 98%... Maybe if you look at the squeeze out Sony would have to pay Tencent on FromSoftware it would be a little different.

 

[mibu no ookami]

Also Colin suggesting that it doesn't make sense to have FromSoftware be part of PlayStation Studios is simply absent from reality.

Sony could put Spider-Man on Switch and Xbox. I actually think it makes sense to put the first game on those consoles, but I'm not going to belabor that point.

There are a lot of reasons to make FromSoftware a PlayStation Studio if this goes through.

First, off you can improve the quality of their games with more technical support, which I've mentioned numerous times at this point. Second, you can probably increase the pace of their games even more. But the third reason is probably the most important reason.

Let's do some back of the napkin math and assume a 70/30 split between Namco Bandai and FromSoftware on Elden Ring after development and marketing costs are paid (lets assume that development and marketing cost 200 million dollars) . Let's assume that the game sold 30 million copies with a breakdown of 50 percent on PC 35 percent on PlayStation and 15 percent on Xbox. Let's assume the game sold at an average cost of 45 dollars.

30 million x 45 = 1.350 billion dollars

Now let's first take that money and separate it into piles

PC = 675 million
PS = 472.5 million
Xbox = 202.5 million

To make things easy, let's assume all copies were digital and ignore brick and mortar retail. We're also going to ignore taxes. We're also going to ignore the ownership Sony has in Kadokawa and FromSoftware currently.

PC
First 10 million = 30 percent (So 3 million)
10-49 million = 25 percent (so 10 million)
50 million+ = 20 percent (125 million)

So valve would get about 138 million dollars from this

PS = 141.75 million
Xbox = 60.75

Add that all together and you get 340.5 million that just goes to platform holders. So remove that from 1.35 billion leaves you with just over 1 billion.

So now you remove the 200 million for development and publishing. Now you're looking at just over 800 million dollars. Now you split 70/30 between the publisher and the developer.

Bandai Namco gets 560 million and FromSoftware gets 240 million.

Maybe because they're a more prestigious developer they get closer to a 55 45 split. You're still looking at 440 million for Namco Bandai and 360 million for FromSoftware.

So back to why Sony would want them...

Let's say you put Elden Ring exclusively on a PS PC storefront and it sells 10 million copies less between Xbox and Steam users who don't follow but you also price the game at 70.

That's 20 million copies at 70 dollars with no revenue splits.

That's 1.4 billion dollars... with no revenue split... This is 10x what you'd get from the previous relationship. And assuming the same development costs and marketing you're still looking at 1.2 billion dollars in operating income. You put out 3-4 of these games and you've already recovered your investment in all of Kadokawa. And you've probably sold more PS5s in the process and you've probably bolstered the number of people using your PC launcher both of which have additional revenue streams associated with them.

So please tell me why you wouldn't make them part of PlayStation Studios.

 

[Yurinka]

Yurinka you continue to disappoint me.

Debt actually makes and M&A more expensive not less. It might reduce the premium, but the overall number is added because you generally have to assume debt. It's also not difficult to look up their debt.

Their IP is captured in the value of their stock price, so no the value of the IP isn't going to increase the price here.

If this reaches 5 billion, you could color me surprised. 4.5 billion is probably the height of this. Depending on the timing of the LOI, you're looking at a market cap as little as 2.3 billion dollars. So to get a premium to take you up as high as 5 billion... is pretty unheard of. And albeit marginal, Sony already owns 2% of the company, so we're still only talking about 98%... Maybe if you look at the squeeze out Sony would have to pay Tencent on FromSoftware it would be a little different.

The value of the company is not just the value of all their stocks in the market, this is just the market cap.

In addition to these stocks in the market, the company has many other things that increases its value, like the amount of workers, IP, etc. or huge profits that may lead to potential, important offices or patents, etc. Basically things that make the acquirer assume the company has more value / long term potential.

And in the same way, there are other things that may decrease the valuation of the company as could be some big issues to solve, huge loses or big debt.

Having another potential acquirer being seriously considered by the acquired bidding for the company also rises the price. I assume that right now there isn't anybody else because the acquisition maybe was started to be considered two years ago when Kadokawa and Sony made the 3 ways deal with Cygames and when Sony got a part of FromSoft, etc.

The acquirer doesn't "generally asume" the debt. If they fully acquire a company, they also fully acquire the debt. So that debt decreases the acquisition price because the acquirer won't pay it twice. It's more complex, but if let's say that Kadokawa would be valued in $5B without debt but has $1B in debt, Sony would decrease the valuation/acquisition price to let's say $4B to pay $4B to the stakeholders for the acquisition, and then Sony would pay "$1B" of the debt to the bank. Again, it isn't exactly like that, it's way more complex (the debt normally gets refinanced etc) but it's to explain the idea.

And well, mentioning the debt was just an example for things that may affect the acquisition cost. I have no idea of Kadokawa's debt (it should be publicly available, I didn't just went to check it), but I assume shouldn't be big and/or an issue for this specific case.

Edit: they kept decreasing its debt until it was 0 back in June, but now they have $77M. Basically nothing for a company of this scale, they are very healthy in this area.

 

[Petekilla]

Looks like things cooled down a bit. I hope we hear something soon.

Reuters said it could take a couple of weeks. These acquisitions don’t happen overnight.

 

[Puff]

Kadokawa has over the years attracted the attention of Microsoft Corp., Tencent Holdings Ltd. and South Korea's Kakao Corp. Anime is one of the fastest-growing segments of the entertainment industry, and an entire generation that's grown up with the biggest franchises is rising in purchasing power and ramping up spending. Japan's anime industry doubled in a decade to ¥3 trillion ($19.5 billion) by 2022, according to the Association of Japanese Animations.

Tokyo-based Kadokawa wants its city neighbor to buy it entirely or not at all, while Sony has long sought to surgically extract assets related to anime and video games. The fact the two are now at a formal stage of negotiation is very encouraging. Both sides might actually be ready to get serious and thrash out a deal.

Sony’s Pursuit of Anime Publisher Holds More Opportunity Than Risk

Sony Group Corp. is flirting with one of the biggest takeovers in the history of Japan’s storied entertainment sector. But first...

www.bloomberg.com

 

[Impulse]

Anyone who thinks Kadokawa is going for 10 billion dollars has no idea what they're talking about and shouldn't be taken seriously on ANYTHING. It's always a good opportunity to catch some as a complete moron.

Colin uses Hoeg Law as a consultant on merger stuff and Hoeg's been the #1 proponent of the 10-15 billion theory.