The dramatic fallout of Embracer Group's financial missteps came to a head in April, when the Swedish corporation announced it would be splitting into three different divisions to finally end months of layoffs and studio closures: Asmodee, Coffee Stain & Friends, and Middle-earth Enterprises & Friends.
Each company targets a different division of the game business—but industry observers are paying close attention to board game and tabletop firm Asmodee. The company, which owns a wide array of board and tabletop game developers, publishers, and distributors, took on €900 million in debt as part of the separation.
Will that debt weigh down a company carrying a major chunk of the sector on its back? According to former Embracer interim chief operations officer Matt Karch, the answer is "no."
"Asmodee's a company that can handle debt, and that's where all the debt's going to be" the CEO (and founder) of Saber Interactive said in a recent conversation with Game Developer about the past and future of former Embracer subsidiary Saber Interactive. He'd been in the midst of praising Embracer's split into a trio of companies, and opined that the decision to assign the debt to Asmodee was likely to pay off.
There's more to glean from Karch's comments—what is it that makes Asmodee so good at handling debt, and what might it mean for its sibling corporations?
The news of Asmodee's financing made some industry observers nervous. It ostensibly resembled a widely-criticized corporate tactic: the private equity-driven practice of acquiring companies then saddling them with the debt needed to finance the purchase. The practice allows the new owner to extract value from the company's assets while forcing it to divert resources to paying down the debt.
Even if you're not familiar with such financial mechanisms, it's possible to interpret this move as one that makes Asmodee responsible for the financial mishaps that put Embracer in such a precarious position. Is that actually the case?
Probably not, said Dr. Mejda Bahlous-Boldi, an associate professor at Ithaca College and director of School of Business' Investment Program. We'd asked Bahlous-Boldi to weigh in on Karch's comments and evaluate what it meant for a firm like it to be good at handling debt.
"A company is well prepared to handle or manage debt if they can generate enough cashflows to service the debt," he explained. "A company that doesn’t have already a lot of debt will more likely be able to manage a debt."
As part of the spinoff, Embracer reported that Asmodee saw net sales of SEK 14.8 billion (about $1.4 billion), and "adjusted EBIT of SEK 1.9 billion on a pro forma basis as per LTM[2] as of December 2023."
That's about on par with the $1.22 billion in sales it reported in its 2023 financial release and the $1.27 billion it reported in 2021.
Bahlous-Boldi explained that analysts paying attention to Asmodee's financial picture are studying D/E (debt to equity) and TIE ratios (TIE is equal to EBIT/ interest expenses of 1 year). If Asmodee is prepared to manage the debt, its D/E ratio should be lower than industry averages, and its TIE ratio higher than industry averages.
After reviewing Embracer's split, Bahlous-Boldi speculated that the deal was structured this way because "not all divisions are expected to be successful and the parent company is better off splitting into 3 companies." Asmodee's status as a profitable and successful division made it the best candidate to shoulder the burden.
That said, Bahlous-Boldi warned that Asmodee will need to generate even more profits to pay off the debt, as the company is using money raised from the financing to pay dividends to Embracer. "From my opinion, the tax motive is credible," he concluded.
If Asmodee is the most successful of Embracer's three children, which might be the least that it's covering for? That unfortunately may be Middle-earth Enterprises & Friends.
Middle-Earth Enterprises & Friends bundles together all of Embracer's triple-A studios and the company in possession of The Lord of the Rings brand. On paper, it has the most well-known and possibly most valuable franchises of the three companies.
In practice, it's shouldering some of the studios that faced arduous struggles in the last decade. These include Crystal Dynamics and Eidos-Montreal, two excellent former subsidiaries of Square Enix that released high-quality games like Tomb Raider and Marvel's Guardians of the Galaxy, but were regularly dinged for "not meeting expectations" by its former parent company (who deserves more of a fair share of the blame for setting impossible expectations and pressing Crystal Dynamics to pivot to live service development with Marvel's Avengers).
Large franchises like Tomb Raider and The Lord of the Rings should be the strongest performers in the division, but games set in the latter franchise have been struggling with infamous, high-profile stumbles of late, and the Tomb Raider franchise will need time to reap the benefits of a Phoebe Waller-Bridge-produced series at Amazon. (Amazon's Lord of the Rings-inspired series The Rings of Power has been scrutinized for if its viewership and subscription gains live up to the series' massively expensive production costs.
Image via Daedalic Entertainment/Nacon.
It's actually the relatively lower-profile studios under the "& Friends" moniker who will boost the division's chances. Dambuster's Dead Island 2, Warhorse Studios' upcoming Kingdom Come Deliverance 2, and 4A Games' Metro franchise currently look to deliver the strongest bang-for-buck.
Meanwhile Coffee Stain & Friends is free to reap the benefits from the Goat Simulator, Deep Rock Galactic, and Satisfactory series. It also gets to ride on the quietly high-profile revenue stream from Easybrain, which Karch boasted was "worth over a billion dollars" all on its own.
If Embracer's pivot works, then Asmodee's debt leveraging can help Middle-earth Enterprises & Friends find stability in unstable times.
Readers most interested in the fate of Embracer's still-massive portfolio of studios are probably still on edge about the possibility of more layoffs and closures punishing developers for the financial mistakes made by people way above their pay grade.
Ultimately, it's many of the same executives who led Embracer to calamity that will be executing this new plan. For all of the financial acrobatics on display, there's no guarantee those leaders won't make the same mistakes again.
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