Unity sets AppLovin bid level to difficult

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An attendee uses a Nintendo Switch game console while playing a video game at the Paris Games Week (PGW), a trade fair for video games in Paris, France, October 29, 2019.

NEW YORK, Aug 15 (Reuters Breakingviews) - Unity Software (U.N) has cranked up the difficulty for its uninvited suitor. The video-game software developer rejected a $17.5 billion bid from rival AppLovin (APP.O), despite promises of huge synergies from the all-stock structure. The economics already look tough for the bidder; getting to a higher price to win over Unity might be a challenge too far.

AppLovin’s offer follows similar logic to Unity’s own $4.4 billion merger plans with ironSource , announced in July. Unity’s focus is a set of tools with which developers build their games; AppLovin and ironSource monetize those games. A combination, including their pools of valuable data, might improve both.

The issue for AppLovin is that their respective valuations reflect this difference. Unity trades at 12 times projected revenue for the year, compared to just over 4 times for AppLovin and ironSource, according to Refinitiv data.

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So while Unity’s plan is to use its richly valued currency to buy relatively cheaply valued ironSource, AppLovin is doing the reverse, using its cheaply valued shares to buy the more expensive Unity. The situation means AppLovin would have to issue a lot of stock, with its initial proposal calling for Unity investors to own 55% of the combined company.

As a lure, AppLovin promises significant savings from a union: $700 million a year, versus $300 million from the ironSource deal. Using post-merger ownership splits, Unity shareholders would have a claim on $3 billion of value today, after taxing and capitalizing the synergies, with AppLovin, and only $1.7 billion from the ironSource transaction.

The bounty failed to sway Unity’s board. While promises of future benefits are high, the upfront premium was only a slim 18% on announcement, which has now evaporated amid a slide in the bidder’s shares. Sweetening the offer would tilt the economics away from AppLovin: Based on analysts’ estimates of Unity’s profitability in 2024, per Refinitiv, and the $500 million in synergies expected to be delivered by that year, the return on investment would be a slim 3% by Breakingviews calculations.

Paying more therefore threatens to destroy value. AppLovin insiders such as Chief Executive Adam Foroughi and buyout shop KKR (KKR.N)control 84% of the vote. If they think Unity is a must-have, they could push further. The question is how much risk they can bear.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Game engine developer Unity Software on Aug. 15 rejected a $17.5 billion unsolicited offer from advertising technology and gaming company AppLovin. Unity said it instead remains committed to the $4.4 billion merger with peer ironSource that it announced in July.

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Editing by Jeffrey Goldfarb and Sharon Lam

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