Frontier Developments AIM:FDEV, the Cambridge-based video games developer, announced today (2nd November) the acquisition of Winnipeg-based Complex Games Inc.
Frontier had already been collaborating with Complex through its third-party games publishing platform, Frontier Foundry, developing the turn-based strategy game Warhammer 40,000: Chaos Gate – Daemonhunters, which was released this May and has become the Foundry’s most popular title to date.
Frontier bought Complex in a CAD13m (GBP8.5m) cash deal, to rise by CAD5.2m subject to Complex meeting certain operational milestones during the period up to 31stDecember 2023. Four of Complex’s senior executives will also be incentivised by a five-year profit-share cash earn-out scheme of up to CAD11.8m to encourage the studio to develop, launch and nurture new games.
Cash funded
The deal of up to CAD18.16m has been fully-funded from Frontier’s cash reserves, with the company reporting GBP53.1m cash on balance as at 31st August 2022. The additional profit-share earn-out of will be funded from future cash profits generated from games developed by the Complex.
Frontier said in a statement this morning that the acquisition would: “deliver modest accretive financial benefits in FY23 and FY24 through a greater level of profitability for Frontier from the ongoing performance of Warhammer 40,000: Chaos Gate – Daemonhunters”.
Jonny Watts, Frontier’s chef executive said in the statement: “This is Frontier’s first acquisition, and we will continue to explore opportunities to grow Frontier’s resources to further develop and nurture our portfolio.”
Complex was founded in 2001 by Noah Decter-Jackson and Adrian Cheater and has 20 employees, mostly developers. By buying Complex, Frontier creates a foothold in Manitoba, a province with a strong community of game developers and Frontier will support Complex’s growth by bringing-on new developers. Close collaboration will continue on Warhammer 40,000: Chaos Gate – Daemonhunters and develop new games in partnership.
Katie Cousins, an analyst for Shore Capital, which has Frontier Developments under coverage said in a research note: “Given the increased share of profits now expected to be retained by Frontier, we plan to increase our FY23F and FY24F adjusted EBTIDA forecasts by GBP0.5m, to GBP25m and GBP31m respectively, noting increased gross R&D is likely to be capitalised in line with the group’s policy.”
Shore Capital retained a ‘Hold’ rating for the stock with a target price of 1.318p.
Strategic acquisition
Cousins added: “We believe this morning’s deal is strategic and will help [Frontier] gain access to talent and resources, and we also welcome the increased control and also reward potential that could come from existing and future projects.”
FDEV currently trades on a premium to its UK listed peers of 40%, with an EV/EBITDA of 18x for FY23F falling to 15x in FY24F, according to Shore Capital. The broker noted a difficult period Frontier faced last year – primarily because of the commercial underperformance of its expansion title Elite Dangerous: Odyssey – and flagged up its concerns around some of the performance of the existing title within a difficult consumer environment.
Frontier opened trading today at 1,318p and had risen to 1,330p by mid-morning. Frontier has offered a -25.46% year-to-date return, a -44.8% one-year return and its shares have ranged between 1,066p and 2,615p over a 52-week period. The company has a market capitalisation on GBP519.6m
