ADAG owned Reliance BIG Entertainment has agreed to acquire 50 percent shareholding in UK based Codemasters, a PC and console gaming company with major franchises like The Ashes (Cricket), Formula 1, Dirt2 and Race Driver Grid (racing), among others, and annual revenues in excess of US$ 150 Million. The other 50 percent is held by Balderton Capital, which had first invested in Codemasters in 2005, apparently with the intention to take it public. With this deal, BIG Entertainment has become the second Indian media company to enter the high-risk PC and Console gaming market, after UTV invested in UK based publisher Ignition Entertainment and MMOG company TrueGames.

This deal is interesting for several reasons:BIG Entertainments gaming business Zapak, which is overseeing this investment, has focused largely on casual games and multiplayer online games, cafes and distribution; from what I remember hearing on numerous occasions, they have consciously eschewed the PC and console gaming market in India, and invested heavily in the online and cafe gaming business. Globally, PC and Console gaming dwarfs the online and casual games business; this is clearly a massive expansion of mandate for Zapak: a new, larger dimension, a much bigger, global playing field.

Secondly, the console and PC gaming business is significantly front-loaded: like films, it requires a lot of investment up front, is heavily dependent on development and marketing, and hits can yield riches, but the risk of flops is high. To their credit, Codemasters does have successful franchises like Ashes 2009, Dirt and F1 2009. Some might even remember them for Brian Lara International Cricket. But it is risky business.

Thirdly, the stake acquired – 50 percent – is an unusual amount, because it is neither a controlling majority stake, nor a minority stake. So who has management control? To get some perspective on this deal, MediaNama spoke at length with Zapak CEO Rohit Sharma:

What’s the rationale behind Codemasters the deal?

If you look at Reliance BIG Entertainment (RBE), there is a strategy to invest in businesses with a strong foothold in the global entertainment space. We’ve done that with the Dreamworks deal, and partnered with quite a few top Hollywood production houses: Tom Hanks’, Julia Roberts’, Ron Howard’s production houses. We’re also cognizant of the fact that we’ve done a lot of interesting things in the Indian market in the gaming space, but the maximum scale and growth is coming from the Western market. Therefore the strategy is for RBE to invest in a significant company which is growing well and fast, and gives us a global fingerprint. We’ve been toying with the idea of acquiring a studio for a long time. Codemasters has a very strong development capability in their code business – Console and PC, and a good distribution network. They have franchises which can be leveraged for the Indian market, and we’re going to leverage Cricket in the Indian market.

Both Reliance BIG Entertainment and Zapak have been looking for partners and acquisitions in the past. We’re still open and also talking to some other companies as well. With Codemasters, we have come in at a stage where we want them to focus on what they’re doing well, and in the next 24 months will go live with several products.

In the past, you’ve said that the focus for Zapak is a focus for the casual gaming market, and not the serious gaming market?

I have never said this. I’ve always believed that the growth of the market, of any market, will come from serious gaming. The problem is that we’ve been focusing on Casual Games and MMO’s to grow the Indian market, but the broadband (penetration) is not increasing, and that’s the problem. We’ve been saying that the growth driver will be PC penetration, Internet penetration and hardcore MMOs, like fantasy and Role Playing Games. Casual games was the low hanging fruit for us in phase one. However, for us casual gaming is doing phenomenally well.

But isn’t Zapak’s business being driven by events and toys?

Not at all. My biggest revenue still comes from online advertising, in-games (advertising), microsites, social media and social games marketing. Events is a very small part of our business. Toys, rather Licensing and Merchandising, is big; even within that, 40 percent of revenue comes from Gaming CDs, and 60 percent from toys.

So your games distribution network for games in India will work well with Codemasters, it seems…

Not only them. We’re working with most other large developers and publishers for distribution of gaming software in India.

Just curious: what happened to Goldman Sachs stake in Codemasters?

I can’t comment on that. Right now, there are only two partners – Reliance BIG Entertainment and Balderton Capital.

How many board seats do you have…who’s got management control? 50 percent stake is neither here nor there…

Obviously, the company is run by its management, operationally. Both Balderton and Reliance BIG Entertainment have equal board seats, but I can’t comment on management control and voting rights.

How much has this stake been bought for? At $150 million revenue, even taking a low valuation of 1x of revenue, it would be at least $75 million for the 50% stake…

That is one thing I just cannot comment on. It is sensitive information.

Is there any debt on Codemasters books that has been taken on board by Reliance BIG Entertainment?

No, it is an equity participation.

What are your plans for Codemasters?

Codemasters has very interesting titles coming out in the next 12-18  months, from their new Ashes game, an online Cricket game. They’re launching F1 in December 2010, and a few others. Their flagship titles that have done well. In the existing business, they are very well poised in terms of their content and distribution. We (Zapak) will work closely with them to build online, social and mobile gaming strategy, which we complement them in. Right now, Jump Games is getting very aggressive on the App Stores, and will be able to make games based on the IP that Codemasters owns. A franchise like Formula 1 can become very big on the mobile.

Also, the PC and console gaming business is a heavily front-loaded business, with significant negative cashflows until the game hits the market…

We did our homework well. They have five flagship titles that will grow well for them, which will give them significant profits. In rally racing, Dirt is among the top titles globally. These are not new IPs and have already been invested in. Now, every time a new release comes, it does well for them. I agree that investing in new IPs is a different ball game, but they have five established IPs.

Was Codemasters hard up for cash, with significant development costs? What this a distress fundraising for them?

It surely wasn’t distress fundraising. There were some liquidity issues, I agree, but not significant or distress, and even before we came in, they were sorted out with their investment banking relationships. There are no issues right now.

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