Thursday, March 22, 2018

Ontario Teachers' Bets on a Gaming Giant?

The Canadian Press reports, Ontario Teachers’ Pension Plan buying $400M stake in video game giant Ubisoft:
The Ontario Teachers’ Pension Plan is spending about $400 million to take a 3.4 per cent stake in French video game giant Ubisoft as part of a complex deal that will allow French conglomerate Vivendi to sell all of its Ubisoft shares.

Vivendi, which was said to be considering a takeover when it accumulated its Ubisoft stake over the past few years, has agreed to sell its 30.5 million shares and not buy any more for at least five years.

Ontario Teachers’ has agreed to acquire 3.8 million shares in the company, which produces games including Assassin’s Creed and Tom Clancy’s Rainbow Six, while Chinese internet giant Tencent is to buy 5.6 million shares.

The rest are to be bought by Ubisoft and cancelled, or sold to existing shareholders and, through an offering, to institutional investors.

Ubisoft says it has a strategic partnership with Tencent that will “significantly accelerate” the reach of Ubisoft franchises in China in the coming years.
Maya Nikolaeva, Matthieu Rosemain and Cate Cadell of Reuters also report, Vivendi selling Ubisoft stake for $2.45 billion, ends battle for control:
French media giant Vivendi is selling its stake in Ubisoft for 2 billion euros ($2.45 billion) to investors including Chinese tech titan Tencent, ending a potential takeover battle for the French video games maker.

Billionaire Vincent Bollore's Vivendi, which had been raising its holding in Ubisoft, has agreed to sell its 27.3 percent stake in the company, best known for its Assassin's Creed and South Park games.

Tencent Holdings Ltd, which dominates China's mobile gaming market, is investing almost 370 million euros for a 5 percent stake, while the Ontario Teachers' Pension Plan is spending 250 million euros for a 3.4 percent stake.

Ubisoft and Tencent will also form a strategic partnership to boost Ubisoft's reach into China, the world's largest video game market with estimated sales of $32.5 billion last year, according to data from gaming consultancy Newzoo.

The move represents a strategic setback for Bollore and Vivendi, which has pledged to make video gaming one of its key pillars along with advertising, music and pay-TV. As part of the deal Vivendi has committed to not acquire any further shares in Ubisoft for five years.

Vivendi's stake-building since 2015 had prompted Ubisoft's founding Guillemot family to court Canadian investors to fend off any hostile takeover.

After the sale Vivendi will remain active in video gaming through its acquisition of mobile game maker Gameloft, which was also founded by a Guillemot brother but is much smaller than Ubisoft, the French leader in this market.

Along with the investments from Tencent and Ontario Teachers, the deal also includes a share buy-back by Ubisoft that adds up to an 8.1 percent stake, as well as a share purchase by Guillemot Brothers SE and an accelerated book building with institutional investors.

Ubisoft said Vivendi had approached it several weeks ago about its intention eventually to sell its stake. Ubisoft started tapping up potential investors at that stage.

Tencent, Asia's biggest listed firm with a market value of around $540 billion, is investing heavily to expand its gaming empire at home and abroad. It launched some of its top games overseas last year, and last month invested 3 billion yuan ($474.73 million) in Chinese peer Shanda Games.

The firm, which stretches from social media to online payment, announced a strong fourth quarter profit on Wednesday, but said mobile gaming revenue growth had slowed.
Ontario Teachers' Pension Plan put out a press release, Ubisoft reaches agreement with Vivendi for its full exit from Ubisoft’s share capital:
  • Vivendi to sell its entire stake in Ubisoft representing 27.3% of Ubisoft's share capital
  • The transaction is structured in the following way:
    • Ontario Teachers' Pension Plan ("Ontario Teachers'") and Tencent, enter Ubisoft's share capital as long-term investors; as part of the transaction, Tencent and Ubisoft have also signed a strategic partnership agreement
    • Share buy-back by Ubisoft of shares owned by Vivendi, accretive to all Ubisoft shareholders
    • Acquisition by Guillemot Brothers SE of shares owned by Vivendi
    • Accelerated Bookbuilding with institutional investors for the remainder of Vivendi's stake
  • All transactions are realized at the price of 66 euros per share
  • Continued roll-out of Ubisoft's growth strategy, based on the company's transformation to a more recurring and profitable business model
  • Ubisoft confirms its financial targets for 2017-18 and 2018-19
Paris – Today, Ubisoft announced that it has signed an agreement with Vivendi for its full exit from Ubisoft's share capital, with the sale of all Vivendi's 30,489,300 shares. The transaction includes an investment by two new long-term investors, the Relationship Investing arm of Ontario Teachers' Public Equities division, and Tencent, a share buy-back by Ubisoft, an acquisition of shares by Guillemot Brothers SE and an Accelerated Bookbuilding with institutional investors. Following the implementation of the transaction, Vivendi will no longer hold any shares in Ubisoft, and has committed not to acquire any shares in Ubisoft for 5 years.

As part of the transaction, Ubisoft and Tencent have also announced today a strategic partnership that will significantly accelerate the reach of Ubisoft franchises in China in the coming years.

Yves Guillemot, CEO and Co-Founder, said: "The evolution in our shareholding is great news for Ubisoft. It was made possible thanks to the outstanding execution of our strategy and the decisive support of Ubisoft talents, players and shareholders. I would like to warmly thank them all. The investment from new long-term shareholders in Ubisoft demonstrates their trust in our future value creation potential, and Ubisoft's share buy-back will be accretive to all shareholders. Finally, the new strategic partnership agreement we signed will enable Ubisoft to accelerate its development in China in the coming years and fully leverage a market with great potential."

"Today, Ubisoft is fully reaping the benefits of our long-term strategy and the successful transformation towards a more recurring and profitable business. Ubisoft is perfectly positioned to capture the numerous video game growth drivers in the coming years. We are focused more than ever on delivering on our strategic plan."

Investment from new long-term shareholders in Ubisoft

Ontario Teachers' has committed to acquire 3,787,878 Ubisoft shares (3.4% of capital), equivalent to approximately €250 million and Tencent has committed to acquire 5,591,469 Ubisoft shares (5.0% of capital). These investments are made at a price of €66 per share and do not grant any representation on Ubisoft's board of directors. Tencent has also undertaken not to transfer its shares nor to increase its shareownership and votings rights in Ubisoft.

As part of the transaction, Ubisoft and Tencent have also signed a strategic partnership agreement that will significantly accelerate the reach of Ubisoft franchises in China in the coming years.

The entry of these two high-profile investors in Ubisoft's share capital validates Ubisoft's strategy and confirms the value creation potential for its shareholders in coming years.

Ubisoft share buy-back

Ubisoft agreed to buy back up to 9,090,909 of its own shares (8.1% of capital) from Vivendi through a structured transaction taking the form of a forward sale of Vivendi shares to Crédit Agricole Corporate and Investment Bank (CACIB), and a forward buy-back mechanism of shares from CACIB by Ubisoft, enabling Ubisoft to progressively buy-back shares from 2019 to 2021. This buy-back will be structured through a derivative product whereby Ubisoft will enter into a pre-paid forward agreement on part of the shares, with settlement in shares at maturity in 2021 or by anticipation, and for the remainder of the shares, a total return swap with settlement either at maturity or by anticipation at Ubisoft's discretion, either in cash (Ubisoft either benefiting or supporting the variation in the value of the relevant shares) or with a settlement in shares against the payment of the price for such shares. The share buy-back will be financed mainly through Ubisoft's existing financial resources. In the event of an increase in the size of the accelerated private placement, the number of shares that are bought back by Ubisoft will be reduced accordingly.

These acquisitions will be made at a price of €66 per share.

Shares bought-back are primarily intended to be cancelled with an accretive effect for all Ubisoft shareholders or used as part of share compensation plans or share-indexed compensation plans for employees.

Finexsi, acting as independent financial expert, rendered a fairness opinion on the share buy-back confirming that the financial terms of the transaction were fair for the minority shareholders of Ubisoft and that the transaction was in the corporate interest of Ubisoft.

Guillemot Brothers SE acquisition of shares

As part of the transaction, Guillemot Brothers SE agreed to acquire 3,030,303 shares (2.7% of capital) at a price of €66 per share, bringing Guillemot Brothers SE's ownership to 17,406,414 shares representing 19.4% of voting rights and 15.6% of share capital and the Guillemot concert to 20,636,193 shares, representing 24.6% of voting rights and 18.5% of share capital. The purchase will be implemented through a structured financing in the form of derivative instruments by which Guillemot Brothers SE will enter into a forward contract with CACIB and a collar financing on these Ubisoft shares, maturing in 2021 or by anticipation, and settled in shares or in cash. Shares underlying the collar financing will be pledged to CACIB, who will be authorized to re-use them from Guillemot Brothers SE subject to certain conditions specified in the agreement.

Accelerated Bookbuilding with institutional investors

The remainder of Vivendi's stake, representing 8,988,741 shares (8.0% of capital), will be sold at a price of €66 per share through an Accelerated Bookbuilding with institutional investors. Based on the level of interest in the placement, the size of the Accelerated Bookbuilding could be increased up to 1,500,000 shares, reducing accordingly the number of shares bought back by Ubisoft.

J.P. Morgan Securities Plc is acting as Sole Global Coordinator on the Accelerated Bookbuilding.

As part of this Accelerated Bookbuilding, CACIB, as Guillemot Brothers SE's counterpart in the forward contract and the collar financing will also sell 2,887,879 shares in the hedging of its derivatives operations.

The transaction will be launched today. Final terms as well as the outcome of the placement will be determined at the end of the bookbuilding expected on March 21, 2018. Settlement will take place two trading days after closing of bookbuilding.

Ubisoft financial targets confirmed

Ubisoft confirms its financial targets for 2017-18 and 2018-19, as well as its long-term growth perspectives.

J.P. Morgan Securities Plc and Lazard Frères are acting as financial advisors to Ubisoft while Bredin Prat is acting as legal counsel.
This is a very big deal for all parties involved. First, Vincent Bollore is selling his stake at a time when Ubisoft’s share price hit a 5-year high (click on image):


Second, this is a big deal for Ontario Teachers' Relationship Investing team led by Ken Manget (click on image):


From its website, Ontario Teachers' explains its approach to Relationship Investing:
Our investments are large — $200 million and upwith no pre-determined hold period. This longer term or "patient capital" view matches reflects Ontario Teachers' long-term obligations to pay pensions, and enables management teams to concentrate on improving long-term shareholder value.

For investee companies, we offer:
  • strong, established partnerships, including a global network of industry and financial contacts who know our reputation and track record
  • sophisticated skill sets of the Relationship Investing deal team
  • the ability to leverage the in-depth industry expertise of our public equities and private equities groups, and the broader resources of our capital markets, and infrastructure teams
  • the ability to structure bespoke investments to meet the needs of unique situations
  • significant liquidity and size, providing the financial firepower needed for large equity investments
  • more than a decade of experience working closely with partner companies
  • a longer-term investing horizon
Our work includes:
  • partnering with industry — we invest in assets alongside premier companies
  • solution investments — we support a major change in a company's strategy
  • constructive engagement — we encourage boards and management to improve business and financial performance
In each situation, we see our involvement as a catalyst. By helping companies to establish themselves, grow through acquisitions, reduce debt and undertake major capital programs, we have been instrumental in transforming entire sectors.

Ontario Teachers' Relationship Investing is different because:
  • We run a concentrated portfolio, more akin to private equity than traditional public equities
  • Our holdings are generally more liquid than private equity, but less liquid than publicly traded stocks
  • We have more influence with our partner companies than investors in widely held public companies do, but less control than private equity investors typically require
  • We conduct appropriate due diligence, similar to private equity investors
  • We are agile
It's obvious Ken Manget and his team know what they're doing and they're well plugged into the who's who of industry leaders which allows them to build and nurture these relationships and invest a significant stake over a long period to match Teachers' long-dated liabilities.

The way I view Relationship Investing is somewhere in between public and private equities without the pros and cons found in both. It's less liquid than public markets and they have less control than private equity but over the long-run, these stakes are significant and allow Teachers' to match its assets and liabilities in another way, foregoing big fees to private equity which is now bracing for a downturn.

You still need to hire a good team that knows how to develop instrumental relationships, one that adds value, and this is where Ken Manget who was appointed to this position three years ago and his team come into play.

Manget holds an MBA from Harvard University and a B.Sc. (Mechanical Engineering) from the University of Toronto. He's obviously very bright and I'm sure holding a Harvard MBA has helped him build very strong relationships with industry leaders.

Why did Ontario Teachers' enter this deal when Ubisoft shares are trading at a 5-year high? Because there is tremendous growth potential, especially in China, and it sees shares rising significantly over the next decade.

As stated above, as part of the transaction, Ubisoft and Tencent have also announced a strategic partnership that will significantly accelerate the reach of Ubisoft franchises in China in the coming years.

Think about it, while President Trump is slapping China with tariffs on up to $60 billion in imports, the 'first of many', others are working with China to grow their internal markets (I guess Larry Kudlow wasn't successful in teaching Trump basic economics on free trade and how the US current account deficit with China necessarily means a capital account surplus, which Wall Street loves!).

Oh well, the way things are going, Trump will soon have plenty of time to enjoy Ubisoft's upcoming video game, Little Rocket Man (I'm being sarcastic on the new game, not on Trump's prospects if he continues implementing idiotic protectionist policies which cost American jobs).

Below, I embedded a clip discussing the successes of Ubisoft nobody is mentioning. Listen carefully to what is discussed in this clip, you will understand what's behind Ubisoft's recent success and why if it continues being a pioneer in gaming, it will continue growing by leaps and bounds.

Lastly, I like this deal for Ontario Teachers' because not only is it investing a significant stake in a gaming giant, it's an industry which is relatively recession proof and one which is growing fast, especially in China. If all goes well, this will prove to be a great deal for all parties involved.

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