October 30, 2018

Breakingviews: Henry Kravis joins gaming value “emote routine”

by Breakingviews.

Henry Kravis is doing an “emote routine.” His private-equity firm, KKR, has taken part in a $1.25 billion investment in Epic Games, the company behind “Fortnite,” the latest video-game craze. The investment values the company at some $15 billion, according to the Wall Street Journal. Epic has shown free games can be lucrative. But the deal clocks in at what seems an over-enthusiastic price.

“Fortnite” has taken over kids’ and teenagers’ devices and their parents’ living rooms. It is one of the first multiplayer online video games to be offered without a fee. The goal, much like in “The Hunger Games,” is to fight to be the last of 100 avatars standing. Users can work individually or together. It is highly engaging: The game has only been around for just over a year, and the company says nearly 80 million people played it in August.

Epic, backed by China’s Tencent, makes money when it sells upgrades such as outfits called skins and dances for avatars, known as emotes. Unlike in many other games, these purchases don’t help a player win. Instead, much like a pair of new sneakers in real life, skins and the like are simply used to show off.

Turns out, kids like to virtually peacock in front of their friends. In May this year, only its eighth month booking revenue, “Fortnite” took in more than $300 million, according to SuperData estimates, making it the biggest month ever for a free-to-play game. Jefferies surmises Epic’s revenue could be some $2 billion this year.

Assuming that top line, KKR’s deal puts Epic’s enterprise value-to-sales ratio almost 15 percent higher than Activision Blizzard, the owner of a portfolio of popular games including “Call of Duty,” “Candy Crush,” and “World of Warcraft.” While Epic has other games, its success is mainly wrapped up in “Fortnite.”

If Fortnite keeps growing, it could justify that valuation. But it is not easy to keep the wins coming. Activision Blizzard bought King Digital Entertainment, the “Candy Crush” maker, in 2016 for less than King’s value at its initial public offering in 2014. “Angry Birds” creator Rovio Entertainment currently trades at under half the stock price at which it went public about a year ago. Kids are already looking for the next virtual playground. That’s a dance contest that is easy to lose.


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