Keywords (KWS) has acquired Fire Without Smoke (FWS) for up to £5.2m. FWS is a creative and marketing services provider to the video games industry. This is an incremental opportunity for KWS to work with games producers on marketing projects (eg trailers). At 7.4x trailing adjusted PBT, this was at the lower end of KWS’s recent acquisition range, and further upside via cross-selling synergies with pre-existing studios is likely.
The acquisition expands KWS’s marketing capabilities, particularly with regard to the creation of trailers and other marketing collateral. Tapping into marketing department expenditure contrasts significantly with the bulk of the company’s preexisting revenues, which are typically funded out of games producers’ development budgets. The recent move towards co-development (eg the Sperasoft acquisition) could naturally lead to an improved pipeline of opportunities for FWS as a result of the strengthening relationships with games publishers.
Founded in 2013, FWS boasts clients including Sony, Riot Games and Ubisoft, which are serviced by c 40 staff from London and Montreal, who will remain with the business post acquisition. We would expect the growing footprint in the UK to lead to further cost synergies in the medium term (eg shared office space).
The £5.2m consideration comprises £3.85m in cash (of which £0.5m is deferred and contingent) and the issue of 77k new KWS shares, which vest on the first anniversary of the acquisition and are subject to lock-up provisions for a further 12 months. FWS is expected to have revenues of £2.8m and adjusted PBT of £0.7m for the year ending 31 May 2018. This equates to trailing multiples of c 1.9x sales and 7.4x PBT, which is at the lower end of KWS’s recent acquisition multiple range (FY16/17 average of 7-10x), and is also substantially below its own adjusted PBT multiple (FY18e: 33x).