| SAN FRANCISCO, March 24
SAN FRANCISCO, March 24 King Digital
Entertainment Plc's IPO-KING.N colorful "Candy Crush Saga" has
gone viral on smartphones worldwide, but the company may
struggle to replicate that enthusiasm with its upcoming $7.6
billion initial public offering.
The flotation this week will be closely watched in the
fast-growing $17 billion mobile gaming industry, which is keen
to emerge from the shadow of Zynga Inc, which has lost
half its value since its 2011 IPO valued it at $8.9 billion.
That may be a struggle for London-based King. While the
company has drawn plaudits for catching the mobile gaming wave
with the most downloaded free app and becoming the top revenue
producer of 2013 on Apple Inc's app store, it relies on
its marquee game for three-quarters of its revenue.
"The red flag for this IPO is that King's revenues and
fortunes are built on one game," Michael Yoshikami, chief
executive of Destination Wealth Management, said. "I would be
inclined not to invest in stock like this."
When upstarts like King and Zynga go public with valuations
approaching those of more established players in the tech space,
"it's all about when (the tech bubble) is going to pop," he
Even if King, which was founded in Sweden a decade ago,
pulls off a strong debut, the real test will be the stock's
staying power in coming weeks and months.
King's debut on the Big Board on Wednesday will be closely
watched by rivals like Kabam and Kixeye -- known for strategy
games like "Kingdoms of Camelot" and "War Commander" -- which
are expected to seek market listings or new financing.
Investors warn of the dangers of an industry where games
like "Draw Something", from Zynga's OMGPop studio that was shut
down a year ago, can top the charts and then quickly fizzle.
Such worries may have dissuaded others. Rovio, maker of the
still-popular Angry Birds franchise, has yet to pursue an
offering, for example.
While King's revenue skyrocketed over 1,000 percent in 2013
from the prior year, its fourth-quarter revenue declined 3
percent sequentially to $602 million. King said the decline
reflected "a decrease in 'Candy Crush Saga' gross bookings,"
though gross bookings of other games rose.
"Revenue concentration in one game would still be palatable
if in fact the game was growing," Sterne Agee analyst Arvind
Bhatia said. "Because it's not, that's a double whammy."
King, which is offering 22.2 million shares at between $21
and $24 per share, will announce final pricing on Tuesday. It
will price shares at eight to nine times earnings before
interest, taxes, depreciation and amortization, which is
slightly below the average of 10 times EBITDA at which
Activision and Electronic Arts are trading, according to Bhatia.
The discount "seems fair and an acknowledgment of negative
factors," said Bhatia, who has yet to rate King's stock. "Zynga
was in denial that its business was declining when it went
public. ... Here, the company is giving you information and
saying Candy Crush has peaked."
WAITING IN THE WINGS
Regardless of how King's stock performs, the company will
become the barometer for a 7-year old, volatile and fragmented
industry. The mobile gaming space until now has seen mainly
smaller players like Glu Mobile list in the United
That may change. Kabam, which expects gross revenue to grow
from $360 million last year to $550 million to $650 million in
2014, is weighing an IPO. Other potential IPO candidates like
Kixeye are also waiting in the wings.
"The King IPO is going to revalidate the gaming space," said
Taehoon Kim, chief executive of nWay, a San Francisco-based
startup that develops online and mobile games.
King's valuation up to $7.6 billion would take it close to
top-tier video gaming giants such as Electronic Arts
($9.4 billion) and Activision Blizzard ($14.9 billion).
There are signs that King's IPO is already galvanizing
investor interest. FunPlus, the China-based company behind
"Family Farm," announced a $74 million funding round last week,
the gaming industry's largest in recent years.
"We're definitely looking for King to prove that gaming
companies can build a sustainable business," said Andy Zhong,
FunPlus's chief executive.
Korea's SundayToz Corp, which went public last
year after its color-matching mobile game "AniPang" went viral,
acted to do just that.
"We were looked at as a one-hit wonder, same as King,"
SundayToz Chief Executive Kevin Lee said. A sequel, "AniPang 2,"
launched in January and emerged as the top-grossing iOS and
Android game in South Korea in just three months.
"People started to then invest in our company and made its
market capitalization grow six times."
(Editing by Edwin Chan, Christian Plumb and Leslie Adler)