Keywords Studios set for more acquisitions, deals eyed before the end of 2020

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Keywords Studios PLC (LON:KWS) is set to do more mergers and acquisition business over the coming months.

The video games services group on Thursday unveiled its third addition since June, picking up LA-based Heavy Iron Studios Inc, a technical specialist that typically works on top-tier game titles.

A structured deal sees the company pay US$4mln of cash upfront, another US$500,000 on the first anniversary of the deal, and up to US$8.8mln of contingent payments tied to performance targets across the first two years under the Keywords’ banner.

It comes after a GBP100mln share placing in May for the specific purpose of funding the next phase of acquisition and consolidation.

READ: Keywords Studios can grow strongly for years to come

That was followed by GBP2mln deal in June to buy Coconut Lizard Limited, a technical and creative services company in Gateshead, and a GBP3.6mln deal in August for London-based creative marketing agency Maverick Media Limited.

Combining a succession of value-adding acquisitions and organic growth has been central in Keywords journey from its 2013 AIM-market IPO to its current position and its GBP1.6bn market capitalisation.

Stockbroker Liberum sees this programme, which it points out has delivered around 40% CAGR profit, will continue for the next three years.

Indeed, chief executive Andrew Day is expecting the deal-making to continue.

“We’ve got a very strong pipeline,” Day told Proactive.

“There’s plenty of confidence on the M&A side as well as the underlying organic growth of the business.”

Day said there’s a fair chance of another acquisition or two before the end of 2020, and that he expects to make good progress on acquisitions into the first half of 2021 as well.

Such deals will likely come in similar and complementary business areas, with the focus on game development and marketing services. Day added that the company is also monitoring other types of opportunities in neighbouring markets.

The Heavy Iron acquisition strengthens and scales Keywords game development service line.

“By bringing a new base on the West Coast, it will provide access to many of the world’s leading game companies and the local talent pool from where we can expand our activities in the region and build upon our existing presence in audio and localisation,” Day said in last week’s statement.

Interim financial results, also out last Thursday, confirmed a 13% increase in first-half revenue at EUR173.5mln, with organic revenues marking an 8% rise. Underlying earnings (adjusted EBITDA) jumped 19% to EUR30.8mln for the six months ended June 30, 2020, versus EUR25.8mln in the same period of 2019.

Keywords highlighted strong demand for its services and a robust trading performance with game development, its largest service line, showing particularly strong growth.

Certain service areas (namely testing and audio) were constrained because of coronavirus (COVID-19) restrictions, as well as some postponements by games publishers. Margins were “held back” due to lower volumes compared to the original planning at the start of 2020, though it expects an improvement to normal levels in due course.

It also expects to resume a progressive dividend policy in 2021.

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