NetEase Keeps Warcraft, New Giant Buys Playtika

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Includes: ATVI, BIDU, CZR, NCTY, NTES, TCEHY
by: Doug Young

Bottom line: Giant Interactive is banking on Playtika to jump-start its stalled growth, while NetEase's extension of a major licensing deal will further consolidate its position as China's second largest online game firm.

A couple of gaming stories are making headlines as we head towards the long Chinese national day holiday, with NetEase (NASDAQ:NTES) and Giant Interactive, both inking major deals that should help cement their place as 2 of China's top players. The first deal has NetEase extending its long-running licensing deal with top global game designer Blizzard Entertainment for some of its most popular titles, including the World of Warcraft series. The second has Giant buying Israeli social game maker Playtika, in a deal that was previously reported to be worth around $4.4 billion.

Both deals come in China's highly competitive online gaming space, which is populated by many small companies with little or no growth prospects and is in need of consolidation. Giant is a case in point. Investors largely ignored the company when it was listed in New York due to poor growth prospects, prompting it to privatize and make a backdoor listing in China this year through a company called New Century Cruises (Shenzhen: 002258).

Following that listing, Giant has achieved a much higher valuation of around 83.9 billion yuan ($12.5 billion), versus $3 billion when it de-listed. But it's a bit unclear if that figure is accurate, since the stock doesn't trade very much - if at all - and the company's value has remained at that level for at least the last 2 months.

Still, Giant apparently has lots of cash and access to credit, which it is now using to try and bolster its position and reignite some growth. That growth could come through this new purchase of Playtika, which Giant has reportedly agreed to acquire by buying all the shares of its parent, Alpha Frontier (English article; Chinese article).

There's no price included in these latest reports. Instead, the $4.4-billion price tag I mentioned above comes from reports back in July, when media said Giant was in talks to buy the online game unit of US gambling giant Caesars Entertainment (NASDAQ:CZR), which included Playtika (previous post). Such a deal would allow Giant to step onto the global stage, joining industry leader Tencent (OTCPK:TCEHY), which owns a small stake in Blizzard parent Activision Blizzard (NASDAQ:ATVI) and is also buying Finnish game maker Supercell.

Relief for NetEase

That leads nicely into the second item, which has NetEase announcing it has renewed its longtime licensing deal with Blizzard for a series of games that includes World of Warcraft, as well as well as StarCraft II and Diablo III (company announcement). The renewal means that NetEase will have the rights to operate the games in China through 2020, extending a relationship that dates back to 2008.

I personally remember the year that relationship began quite well, since it was big news when Blizzard formally severed its previous World of Warcraft licensing agreement with The9 (NASDAQ:NCTY) and formed the new partnership with NetEase. That relationship has obviously been beneficial for both sides, helping to propel NetEase to its current position as China's second largest gaming company after only Tencent.

I had previously said that Tencent's purchase of 6 percent of Activision Blizzard in 2013 looked ominous for NetEase. That was because it appeared that Tencent, as China's biggest game operator, might use its new leverage with the US game designer to steal World of Warcraft from rival NetEase when the current license expired this year.

So this latest license renewal represents a big relief for NetEase, which would have suffered large damage if it lost the license. The new agreement also testifies to NetEase's strong ability as a game operator, even if it probably paid a big price to secure the renewal. I've previously written that NetEase is quite a dynamic company and could eventually supplant Baidu (NASDAQ:BIDU) as China's third-largest Internet player (previous post). This license renewal will certainly allow the company to maintain its position as a strong second to Tencent in China's competitive online gaming space.

Disclosure: None

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