Playtika’s (NASDAQ:PLTK) upped offer for Angry Birds producer Rovio Entertainment Corporation drew criticism from an analyst that covers the suitor.
Scenes from an Angry Birds game. An analyst is pondering why Playtika lifted its bid for the game’s producer, Rovio Entertainment. (Image: Vox)
In a note to clients today, BTIG analyst Clark Lampen called Playtika’s increased bid “perplexing.” That’s when accounting for its $600 million tender offer deployed in the fourth quarter and a recent $25 million investment in Ace Game. He rates shares of Playtika “neutral.”
Based upon the multiples, margin dilution, balance sheet impacts, and optics of the acquired business, the deal is a bit of a stretch,” wrote Lampen.
Yesterday, Playtika announced a new offer for Rovio, then valued at $9.78 a share, based on Thursday’s foreign exchange rates. That all-cash bid was a 55% premium to where the target’s shares closed on Wednesday, and well above the 40% premium floated last November when the suitor made its initial offer. It’s believed the original offer was turned away due to high insider ownership at the Finnish company.
Playtika Investors May Not Be Enthused by Offer
On a strong day for growth stocks, Playtika surged 7.48% today. But that doesn’t mean investors are keen on the boosted offer for Rovio. In fact, the opposite could be true.
“On the surface, this is an acquisition that we expect investors would have a tough time rewarding Playtika for in the short run,” Lampen said.
Some market observers previously highlighted Playtika’s fragile balance sheet, lower revenue per daily active user and declining margins as issues the company needs to address before embarking upon on large-scale acquisitions.
BTIG’s Lampen noted the purchase of Rovio would “effectively drain Playtika’s balance sheet cash,” leading to net leverage of 2.3x earnings before interest, taxes, depreciation and amortization (EBITDA).
Detractors are also apt to note that Playtika is nearly a year removed from announcing a strategic review that could have included a potential sale. Such a deal hasn’t materialized, and now the company is moving in the opposite direction by pursuing an acquisition.
Playtika Rovio Bid May Have Supporters
Rovio investors clearly liked the increased offer from Playtika, as the target’s shares surged 36% in Helsinki today. Additionally, there may be support for the transaction among the suitor’s investors, despite the drab analyst commentary.
“Deal defenders suggest a Rovio buy fits Playtika’s strategy of fitting smaller games/studios into its Boost live operations assets – or that adding Rovio’s growth would help management exceed PSU grant targets while also reducing the potential for Playtika’s biggest shareholder (private Giant Group) to strip away balance sheet cash that would be more productive elsewhere,” according to Seeking Alpha.
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