Ubisoft - We're playing for it - Initiation - Positioning
All,
Please find our initiation on Ubisoft here.
It gets interesting when founder management are officially gamers, and in a game they’ve written themselves. It turns out, nobody’s gun is particularly effective, and as Credit Agricole know all too well, it’s best not to pull the trigger. So, having played through this open world game more than once, we see the balance in our favour. If we lose, everyone does.
Investment Rationale:
- We buy 5% of NAV in the 2027 bonds at 81.5 c/€ on the "bet" that, in the next 9-12 months, we will hear of a bank financing solution that will layer the bonds, but at the same time provide the liquidity to address their maturity. On the downside, we see these bonds covered, since an insolvency scenario is far out of the question and therefore an LME could not leverage it to force a discount from the bonds that would far exceed their present trading levels. The founders would lose everything, and so would Credit Agricole. Tencent would lose a lot.
- We expect to receive par for these bonds at the latest in 12-15 months time, which should earn us at least 17% IRR and more if Ubisoft raise the cash earlier, which they did at least on occasion of the '26 convertible put.
Sarria | UBISOFT - Client Call, Thursday 5 Feb, 3 pm UK | 10 am EST
Key Conclusions:
- Ubisoft has repeatedly missed guidance and has not generated positive FCF since the pandemic, leaving it exposed to significant near-term debt redemptions and maturities. To respond, it transferred its core franchises — Assassin’s Creed, Far Cry, and Rainbow Six — into a new subsidiary, Vantage Studios, and sold a 26.32% stake to Tencent for €1.16bn. The proceeds do not cover upcoming refinancing needs, and the business is not refinanceable on a standalone basis today. Management clearly pointed to refinancing solutions before mentioning asset sales, which establishes financing — not disposals — as the primary path forward (Recent Trading).
- Alongside the Tencent transaction, Ubisoft introduced a revised corporate structure and expanded its cost-reduction programme, adding €200m of incremental savings to the previously announced €100m plan. Headcount already fell roughly 10% year-on-year, yet free cash flow will deteriorate further before improving. Management withdrew guidance again, underscoring weak forecasting visibility and operating strain. When questioned on funding options, management led with refinancing tools and only later acknowledged asset sales, reinforcing that financing drives the plan (Recent Trading).
- Because Ubisoft generates persistently negative free cash flow, a conventional DCF framework does not produce meaningful results. We instead triangulate enterprise value using the Tencent Vantage Studios transaction, industry M&A benchmarks, and trading comparables, then assemble a sum-of-the-parts valuation of near €1.6bn, assigning €2.2bn to Ubisoft’s retained 75% stake in Vantage Studios by assuming Tencent overpaid by 50% — a deliberately conservative haircut to a strategic transaction price. We value the remaining creative houses at about €800m using revenue trading multiples and subtract roughly €1.4bn for normalized negative cash flow capitalized at sector EBITDA multiples. This structure shows how cash burn impairs current enterprise value (Valuation).
- The Guillemot brothers would not execute a crown-jewel "drop-down" into Vantage Studios one year before roughly €1bn of redemptions and maturities commence without having a financing solution in hand. We rule out conciliation or safeguard proceedings because they would destroy value for both parties. We also rule out coercive liability management exercises because they would deliver limited benefit for enormous disruption. Additional joint ventures or minority stake sales remain possible but unnecessary if a simple refinancing delivers sufficient capacity (Ubisoft’s Options).
- The most credible solution is new, structurally senior secured bank financing raised at an intermediate holding level against the retained Vantage Studios stake. This structure almost replicates drop-down economics while maintaining investor alignment and execution certainty. Several signals support this view: management emphasized financing first when discussing refinancing mechanics; the company is replacing the revolving credit facility with a new structure; the Tencent deal establishes a third-party valuation anchor; and financing could have been arranged alongside the transaction. Credit Agricole stands out as a logical lender given its existing exposure (Ubisoft’s Options).
- Announced cost savings alone will not restore breakeven without meaningful revenue growth. We make no adjustments to R&D capitalization because spending levels and accounting treatment follow industry standards and only mildly exceed amortisation. Even after the Vantage Studios stake sale, internal cash resources will not cover the 27 Notes due to continued heavy cash burn and front-loaded restructuring costs. When addressing the 2026 put, Ubisoft already needs a solution for its 2027s, which become current around the same time (Model).
Summary:
- Headquartered near Paris, Ubisoft is a mid‑tier global video game publisher by market share with strong IP assets and a top-three position in the AAA gaming segment. Titles are operating primarily on console and PC, with selective exposure to mobile. Tightly controlled by the founding five Guillemot brothers, the company has somewhat overslept the trend towards diversification into recurring revenue streams from platforms and app stores, which has contributed to its now niche positioning in a financially relatively unattractive, highly volatile segment of the market.
- Insufficient R&D control and an overly centralised command structure have contributed to excessive cost overruns and a slowdown in its release schedule. Consequently, Ubisoft is generating vastly negative FCF and ahead of a redemption and maturity wall in 2026/27. To raise cash for it, the company has had to drop its principal IP assets into a subsidiary and sell over 1/4 to rival and minority shareholder Tencent, but the proceeds alone will not be sufficient for the task. The market is worried.
Catalysts ahead:
1) May: Q4 reporting. This should be well guided for now, and we know the numbers will be weak. There will be avast €650m write-down of gaming IP, but we should also expect the (typically scant) outline of a turnaround plan. There should be a new RCF - possibly at an intermediate holding and secured over the remaining stake in Vantage Studios.
2) November: OCEANE ’28 Put.
3) November: H1 results
4) Bank Debt to layer bonds.
5) March ’27: Q427 ends and auditors will want to see how the company will pay down those bonds.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk