Tencent Focuses on Majority Deals and Overseas Gaming Assets for Growth

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HONG KONG, Oct 1 (Reuters) – Tencent is resetting its mergers and acquisitions strategy to focus more on buying majority stakes mainly in overseas gaming companies as the tech giant eyes global expansion to compensate for slowing growth in China, people with direct knowledge of the matter said.

Tencent Holding Ltd (0700.HK) has been investing in hundreds of emerging companies for years, primarily in the onshore market. He generally acquired minority stakes and remained invested as a passive financial investor.

However, it is now aggressively seeking majority or even majority stakes in foreign targets, including gambling assets in Europe, the four people with direct knowledge of the matter told Reuters.

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The shift comes as the world’s top gaming company by revenue looks to global markets for future growth, which requires a strong portfolio of top-charting games, the sources say.

Tencent’s new strategy outlines how Chinese tech titans are seeking to emerge from the regulatory shadows after two years of repression and uncertainty that have weighed on their door-to-door sales and sparked a sell-off in their stocks.

Besides the core gaming business, Tencent is also looking to grab global assets, especially in Europe, tied 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.

Tencent told Reuters the company has been investing overseas for a long time – “long before any new regulations” in China. It seeks “innovative companies with talented management teams” and gives them the opportunity to grow independently, the company added, without giving further details.

Tencent’s pursuit for bigger stakes in game companies comes as other tech giants such as Microsoft, Sony (6758.T) and Amazon grab game assets and related intellectual properties, have said three of the sources.

Tencent chief strategy officer James Mitchell said on a post-earnings call in August that the company would remain active in acquiring new game studios overseas.

“In terms of gaming 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.”

IN SEARCH OF BIGGER STAKES

Tencent’s growing focus on foreign assets and markets stands in stark contrast to its much slower pace of trading in the country since the intensification of regulatory measures and the divestment of a group of domestic holding companies.

From 2015 to 2020, the owner of China’s number one messaging app, WeChat, made 150 investments in his country for a total of $75 billion, compared to 102 deals worth $33 billion on overseas markets, according to Refinitiv data.

In August, Tencent reported its first-ever quarterly decline in revenue, partly impacted by a lack of gaming approvals in China and regulations that limit playing time. Online gaming revenue fell by 1% both at home and abroad.

Its Hong Kong-listed shares have fallen about 60% over the past two years.

Against this backdrop, Tencent has barely invested in China this year compared to 27 deals worth $3 billion overseas, according to Refinitiv data. He shrunk his portfolio partly to appease regulators and also to make big profits, sources told Reuters.

“We believe that Tencent will continue to make reasonable investments to acquire quality gaming content and talent and deepen its partnerships with leading studios around the world to intensify its investment and presence in overseas markets.” , Citi analysts said in a report in early September.

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

Additionally, with Beijing strictly restricting game approvals in its country and still suspending approvals for games from foreign IP addresses, Tencent is forced to take control of foreign game companies and their IP addresses, the four sources said. .

In September, Tencent increased its stake in Ubisoft in a deal that made the Chinese company the largest shareholder in France’s top game developer, with an 11% stake that could be further increased to up to at 17%.

REGIONAL POLE

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

Last year, Tencent announced it would take over British video game developer Sumo in a $1.3 billion deal – one of its biggest overseas deals since a regulatory crackdown. end of 2020.

In Europe, with the exception of its purchase of a majority stake in “Clash of Clans” mobile game maker Supercell for $8.6 billion in 2016, Tencent has for years mostly made deals with minorities, notably its purchase of 9% of the British games company Frontier Developments.

Elsewhere, Tencent is also looking to increase 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, home to its international game publishing business.

Since last year, the company has repeatedly emphasized that it aims to have half of its gaming revenue come from outside of China, up from around 25% currently. In doing so, he launched a new publishing brand called Level Infinite in Singapore in December.

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Reporting by Julie Zhu and Josh Ye; Editing by Sumeet Chatterjee and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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