Long-awaited IPO by Rovio, makers of Angry Birds to go for $1.1B: an interesting turn of events

Rovio Entertainment Ltd. (formerly Rovio Mobile as at March 2011) is a Finnish company operating in the video game industry. Currently, they have two major divisions Rovio Games and Rovio Brand Licensing. Meaning, they don’t only make games but they also license and franchise their brand assets and intellectual properties such as what they did with ‘Angry Birds’ which will be highlighted in the next paragraph.

Fun-fact: Angry Birds was Rovio’s 52nd game. At the time of its release, they were going bankrupt.

Angry Birds is a video game series (about 14 of them now) first released in December 2009 by Rovio. Since then, Rovio’s games have been downloaded more than 3.7 billion times (as at end of June ’17) and Angry Bird is reputed to be the #1 paid iPhone app in over 60 countries. In addition, versions of it had been created for the PCs and even game consoles like Xbox. The game basically features multi-colored birds and pigs, where, the birds try to save their eggs from the pigs (their enemies) using slingshots. Its success led to several adaptations that helped to expand the brand. Those adaptations include; merchandise (in form of Toys, Print Publications, and Food products), TV Cartoon series, feature films (3D animated angry birds movie) and even at parks.

The first Angry Birds 3D-movie released in 2016 grossed $350 million worldwide, including $107 million domestically, compared to its $73 Million budget we see a huge profit margin. It was successful not only because of profits but also the movie rating – generated an A+ CinemaScore among the core under 25 audience as reported by Dave McNary, a film reporter for Variety.

Save the date: Angry Birds 2 movie will land in September 20, 2019 which coincides with Angry Birds 10th anniversary. This also comes after the arrival of their Angry Birds 2 game debuted in 2015 (July 30).

Funding and Valuation History

In 2011, Rovio raised $42million in venture capital funding from Accel Partners, Atomico Invest, and Felicis Ventures.

Fun-fact: Trema Holding (the company owned by Rovio CEO’s father – Kaj Hed) owned about 70% of Rovio in 2012. While Accel Partners and Atomico owned 10% each and Felicis ventures 1%.

Now, with Accel and Atomico owning 20% of Rovio, it means that their (Rovio) post-money valuation is $210 million. However, this is just one form of valuing a company. Another way would be to compare what another company is willing to pay for the company to be potentially acquired. In 2012, Arvopaperi reported that Rovio declined a $2 billion bid by Zynga (makers of FarmVille), a rival gaming company. Estimates in the US put Rovio, Angry Birds parent company at an over-ambitious $6 – 9billion. In that period, Rovio was expected to go public by the following year, 2013 (an announcement that could have led to the potential uprising in valuation). However, sadly, that didn’t happen and sales fell by 73% in 2014 (after falling 52% in 2013) no thanks to consumers move from paid apps to ‘freemium’ models. Most notorious is Candy Crush Saga (over half a billion downloads in 2013 with revenues skyrocketing) developed by King, a British mobile group. Another popular game is Clash of Clans by SuperCell both of which offer basic gaming and then charge for additional features (in-app purchases). During this time, the fed off their licensing unit, but this not without losing two CEOs and laying off staff.

During this dark time for Rovio, they fed off their licensing unit (which brings in only about 20% of the revenue for the group). As a result of falling revenues, they sought to introduce experienced hands to their management tier to stage a comeback for the once blooming company. They replaced two CEOs and laid-off staff within that period.

Fun-fact: Mikael Hed, co-founder and one-time CEO (2009 – 2014) now runs the groups animation division and was the executive producer for the Angry Birds 3D-movie.

A ray of sunshine (the movie) spurring the decision to IPO now

After the success of the ‘Angry Birds’ movie, the company behind it, Rovio, stated that they could raise about $36million by the sales of issues which would help improve strategic flexibility and growth.

Fun-fact: Pekka Rantala, former senior staffer at Nokia and chief executive of Hartwall, a Finnish drinks company became the next CEO after Mikael Hed

However, this move doesn’t state how much their potential valuation would be, just as Ms. Kati Levoranta, Rovio’s new chief executive told the Financial Times (FT) “we are not commenting on potential valuation”.

Now, imagine they had IPO’d in 2012 at the time when Angry Birds was at its peak (receiving high valuations of about $7Bn), Kaj Hed shares would have been worth a whopping $4 billion. Well, no time to mourn as it would still be a ‘unicorn‘ if it trades at the targeted $13.74 per share to raise the expected $36million. So yes, I think it is a good thing they are IPO’ing now when the interest in their brand has been re-sparked by the movie.

Abbreviation: IPO – Initial Public Offering

One major concern is whether Rovio is more than a one-hit wonder, Angry Birds. This is not a unique problem to only Rovio, a games-first company as other game makers have been seen to experience difficulty in releasing another hit game after their first successful hit game. For instance, Candy Crush Saga’s maker, King, has been accused of making the same kind of games since 2012. In fact, King’s IPO in 2014 was regarded ‘a disaster’ as it traded 15% below its asking price on its first day (hopefully, Rovio’s case will be different).

Take-away: Transforming games to sustainable start-up is difficult, tell your developer friends.

Richard Holway, Chairman of TechMarketView doesn’t criticise the game makers but the investors who think “…these companies will continue to fly forever.”, as reported by FT.

But as for Rovio, they seem to have ‘over’ leveraged their Angry Birds brand (as seen above) and while that does not look like a problem, at first sight, consumers already started losing interest already in the brand (can be seen in the drop in revenue for the company from 2013 till 2015) and will most likely continue.

The Economic Law of diminishing returns also applies to gaming coupled with the ‘tolerance’ component of addiction where the user needs ‘more’ of the activity/substance to derive the same level of pleasure previously enjoyed.

Although, interest and appeal in the Angry Birds brand were rejuvenated by the movie’s success they need to invest in new IP urgently. This they hope to do with the funding they expect to raise from their IPO: “…it could be that we buy in talent or new IP.”, Ms. Levoranta as reported by the FT. For attracting talents, substituting cash for shares (options mostly) tend to work well for publicly traded companies as they know they can easily sell the shares when the options vest.

According to Arvopaperi magazine’s 2012 article, here is the share breakdown of Rovio:

Kaj Hed / Trema International Holdings BV – 69.7%
Niklas Hed – 4.3%
Peter Vesterbacka – 3.1%
Mikael Hed – 0.6%
Employees – 1.3%
Accel Partners – 10%
Atomico Invest – 10%
Felicis Ventures – 1%
Total 100%

Eager to see how this changes after the IPO. Although, Rovio has reported that Kaj Hed’s shares will be down to 37% after the listing via the sale of his shares in the form of a secondary issue for which profits will be paid to him in compensation.

Here, Secondary offering or secondary share sales refer to the sale of a large portion of Mr. Kaj Hed’s holding in the company. The proceeds of this sale are expected to be paid to him after the sale.

To reiterate, alongside the secondary sales, Rovio company will introduce primary issues worth $35million to the stock market at their IPO, as stated in a press release on the company’s site.

The company expects to sell about 55 percent of its shares in the flotation raising between $523.18 to $582.90 million, however, Rovio company itself will own only about 5% of that figure (which is the initially mentioned $35million).

The subscription period starts on 18th September with trading expected to be on the (Nasdaq) Helsinki bourse’s pre-list on Sept. 29 and on the main list on Oct. 3.

New word alert: Bourse is defined as a stock market in a non-English country

Check out Rovio’s financial highlights here. You can also read a more about the IPO details from Rovio.

Thanks for getting up to this point in my article. You can chat me up about this here or on my Twitter page. Before I go, can we all hail Kaj Hed for being the biggest gainer in this 🙂 LOL.