FT Alphaville spent a good chunk of the first lockdown thinking about corners. Not in relation to home design or statistical outliers, but places where the rubber meets the road. More specifically ones of such infamy that they’ve even been given names like Rascasse, 130R and Eau Rouge.

Yes, over lockdown FT Alphaville got into Formula One via the medium of the video game. Perhaps it was the therapeutic nature of endlessly circling something, or simply a coping mechanism to make up for the lack of competitive professional sport, but gliding around the streets of Monte Carlo, Baku and Melbourne bought us great pleasure during Spring’s darkest days. Just don’t mention Montreal and the Wall of Champions.

It seems we weren’t the only ones. Here’s a statement from Codemasters, the UK-based video game studio who create the F1 video game franchise (and other racing titles), released Friday:

Statement regarding recent media speculation

Further to the recent media speculation, the Board of Codemasters confirms that it is in discussions with Take-Two Interactive Software, Inc (“Take-Two Interactive”) regarding a possible offer for the Company.

The Board of Codemasters has received a non-binding proposal from Take-Two Interactive Software, Inc (“Take-Two Interactive”) to acquire the entire issued share capital of Codemasters at a price of 485 pence per share (the “Possible Offer”), comprising 120 pence per share in cash and 365 pence per share payable in Take-Two Interactive shares. The Possible Offer remains conditional on, among other things, the completion of confirmatory due diligence by Take-Two Interactive and the recommendation of the Board of Codemasters. Take-Two Interactive reserves the right to waive any of these requirements.

The full FT story can be read here.

Take Two’s offer for Codemasters caps a pretty sensational year for investors in Sim-racing, as it’s now called. Codemasters’ shares are up 70 per cent year-to-date off the back of lockdown-induced enthusiasm, which included some races being broadcast on Sky featuring professional drivers and YouTube celebs.

Meanwhile, the “buy shovels in a gold rush” trade has been even more lucrative. €268m German-listed Endor AG, who own the gold-standard sim racing hardware brand Fanatec, has seen its shares rise a touch under 300 per cent this year after recording triple digit revenue growth. Gaming headset maker Turtle Beach is up 87 per cent this year, with its latest quarterly results revealing that earnings-per-share rose to $1.20 after a loss of $0.22 in the same period in 2019.

Signs of enthusiasm for the virtual sport are there in the soft data also. YouTube sim-racing influencers such as TRL Limitless and Tiametmarduk have seen both their page views and subscriber numbers jump over 50 per cent this year, according to YouTube data site SocialBlade. While current F1 drivers (IRL) such as Monégasque Charles Leclerc and token posho Lando Norris have been regularly sim racing on their own YouTube channels.

But the pressing question is, are Codemasters’ shareholders getting a good deal from Grand Theft Auto publisher TakeTwo? The 11 per cent premium to Thursday’s close seems a bit low to us for a business that’s been on a tear this year, and the analyst community seems to agree. Here’s Panmure Gordon’s Alasdair Young on the deal:

Not very generous?

If accepted, 485p implies a current-year PE of 21.5x, or 20.0x once the healthy net cash balance of £50m is stripped out. Furthermore, as stated at the time of the recent trading update, we think the likelihood of additional upgrades at the interim results on 23 November is extremely high. After over 100% revenue growth in H1, consensus implies 10% yoy growth in H2. Our EBITDA estimates are 10% ahead of consensus, and we believe them to be conservative. Moreover, we have long argued that the primary value driver for Codemasters is the ongoing shift to digital distribution which could see operating margins rise by over 10% in the medium term. In our view, these factors, let alone an attractive bid premium, do not seem to be fully captured in the proposed offer.

With the shares at pixel time trading tight to the offer price of 485p, the market reaction suggests this deal still has a few more laps to go until the finish line.

Related Links:
If you can’t beat them, join them: football and F1 team up with esports — FT Big Read

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