Giant Network's 30.5 billion overseas mergers and acquisitions may involve regulatory risks in the gaming industry

Recently, Giant Internet shell company Century Cruises announced that it will issue new shares to the consortium at a price of 39.34 yuan per share to acquire Playtika, an Israeli company whose core business is casual social chess and card online games. The consideration for this transaction is 30.5 billion yuan, which is less than a year since Giant Network borrowed Century Cruises for 13.09 billion yuan.

Recently, Giant Internet shell company Century Cruises announced that it will issue new shares to the consortium at a price of 39.34 yuan per share to acquire Playtika, an Israeli company whose core business is casual social chess and card online games. The consideration for this transaction is 30.5 billion yuan, which is less than a year since Giant Network borrowed Century Cruises for 13.09 billion yuan. It is worth noting that Playtika has no plans to enter the China market for the time being after completing the acquisition.

In addition, the reporter noted that there are still many approval risks in this acquisition of Century Cruises, including but not limited to the filing by the National Development and Reform Commission and the filing by the commercial authorities. Playtika was acquired by the American gaming giant Caesar Entertainment Group in 2011. The reason why Caesar took a fancy to it is inseparable from its social characteristics of gambling games. Industry insiders pointed out that gambling games are sensitive areas in China. Given the current tightening of overall mergers and acquisitions review, such underlying assets may have certain regulatory risks.

Big deal: 30.5 billion yuan acquisition of Israeli game company Playtika

On November 1, 2016, according to the "Report on Issuing Shares and Paying Cash to Purchase Assets and Raising Matching Funds and Related Transactions" released by Century Cruises, Century Cruises plans to allocate resources to Chongqing, Oceanwide Capital, Shanghai Hongchang, Shanghai Lingyi, Shanghai Lingyi, Chongqing Jiezi, Hony Chuangling, Xinhualian Holdings, Sichuan Guopeng, Guangdong Junte, Hongjing Guosheng, Kunming Jinrun and Shanghai M & A funds have a total of 13 counterparties. Private issuance of shares and cash payment to purchase all Class A ordinary shares of Alpha Frontier Limited (hereinafter referred to as "Alpha"). The consideration of 30.5 billion yuan for this transaction will be paid by Century Cruises in the form of share issuance and cash payment, of which 25.5 billion yuan of the transaction consideration will be directly issued to the consortium of the above-mentioned 13 trading parties at a price of 39.34 yuan per share, and the remaining 5 billion yuan will be raised from Giant Investment Co., Ltd.(hereinafter referred to as "Giant Investment") at a price of 43.66 yuan per share.

According to public information, Giant Investment is a company controlled by Shi Yuzhu, the controlling shareholder and actual controller of Century Cruises. It is worth noting that Giant Investment's increase price of 43.66 yuan per share is not only higher than the increase price of 13 trading parties, but also promises a lock-in period of 36 months. In this regard, the relevant person in charge of Shanghai Giant Network Technology Co., Ltd.(hereinafter referred to as "Giant Network") explained to reporters: "Giant invested 5 billion yuan to increase its shares in listed companies, which shows full confidence in the company's long-term business development." After the transaction is completed, the listed company will directly hold all Class A ordinary shares of Alpha.

On July 30, 2016, Giant Investment (HK) Limited ("Giant Hong Kong"), a wholly-owned subsidiary of Century Cruises, signed the Consortium Agreement with Shanghai Dinghui Yunyi Equity Investment Partnership, Hony Entrepreneurship, Shanghai Yunfeng Investment Management Co., Ltd. and 11 other investors. Based on the "Consortium Agreement", Giant Hong Kong will form a consortium with its investors. The consortium investors will jointly increase the capital of Alpha and use it as the main body to acquire Caesars Interactive Entertainment, Inc. (hereinafter referred to as "Caesar") has a 100% interest in a mobile casual social game business. In the formation of this consortium, Giant Hong Kong plans to invest US$1 million to participate. Through this acquisition, Giant Hong Kong indirectly holds all of Alpha's Class B common shares, which means that Century Cruises will hold a total of 100% of Alpha's shares.

Playtika: Profits enough to support Giant Network's performance commitment?

According to public information, Playtika was founded in 2010 and is an Israeli online game company with casual social board games as its core business. In 2011, Playtika was acquired by U.S. gaming giant Caesar Entertainment Group. Over the past five years, Playtika has maintained an average growth rate of 50% to 55%, occupying a leading market share among board and social games in North America, and is the sum of the bottom two, three and four. From 2014 to the first half of 2016, Playtika achieved operating income of 3.308 billion yuan, 4.547 billion yuan and 2.977 billion yuan respectively. The net profit attributable to the parent company after deducting non-recurring gains and losses was 651 million yuan, 1.067 billion yuan and 733 million yuan respectively.

The "Asset Evaluation Report" issued by China Qihua Asset Evaluation Co., Ltd. shows that Playtika's estimated net profit will be approximately 1.528 billion yuan, 1.994 billion yuan and 2.415 billion yuan respectively in the income method evaluation from 2016 to 2018. Previously, when borrowing a shell Century Cruises, Giant Network gave a performance commitment that the net profit attributable to the parent company from 2016 to 2018 would be no less than 1.002 billion yuan, 1.203 billion yuan and 1.503 billion yuan.

"Through this transaction, Century Cruises will greatly enhance its competitiveness in the global online game market, create a global game distribution and operation platform, and use the target company's accurate user analysis and marketing capabilities to help Century Cruises carry out comprehensive industrial chain Expand and upgrade, enhance marketing and promotion capabilities, expand market share, implement the development strategy of 'internationalization, high-quality, and mobile phone', and enhance Century Cruises' sustainable profitability and development potential. After the completion of this transaction, Century Cruises 'operating income and net profit attributable to shareholders of the parent company will increase significantly in the next few years, and basic earnings per share will increase." The relevant person in charge of Giant Network said this.

However, Playtika's rapid growth is inseparable from its unique business model and the social characteristics of gambling games. Public information shows that Playtika acquires cheap game assets, uses big data, artificial intelligence and other technical means to continuously analyze, understand and learn users, and outputs refined operational transformation plans for games. Currently, three of the six main products come from mergers and acquisitions. The relevant person in charge of Giant Network pointed out: "After many games were acquired by Playtika, the profitability has been significantly improved. It can be said that Playtika has strong advantages in the fields of resource integration and game transformation."

Focus issue: Playtika's high growth is due to the

relevant person in charge of the gaming game Blueport Interactive who pointed out to reporters that each company will establish an operating method around core values, increase revenue and profits, and be able to be acquired for 30.5 billion yuan, indicating that Playtika has been recognized by the market at this stage. The more important reason is that in foreign countries, board games are gambling games and can be operated openly.

Overseas, gambling games are mainly divided into two categories, namely slot games and board games. Due to my country's legal and policy factors, gambling products such as slot machines are one of the targets of severe crackdowns. Board games naturally have game nature and can easily be transformed into pure gambling games. Therefore, board games are frequently exposed by the media to involve gambling incidents. The reporter searched the Internet for the game "Slotomania" produced and launched by Playtika in 2010. The search results showed that "Slotomania", unlike other games, is a video slot game. When the reporter downloaded the game through the APP Store, he noticed that the APP rated the game as 12+ because of the frequent/strong simulation of gambling. A player named "dangdang8818" left a message in the user comment area saying,"You can enjoy the addiction of slot machines without going to Macau. The fun can't stop!"

Entertainment analyst He Jie also said in an interview with the media that Playtika mainly sells gambling games, and the profits of gambling games overseas are generally high; Shanghai Securities News also reported that Playtika is basically considered to be a company engaged in gambling games.

Industry insiders pointed out that you can judge whether a chess game is a gambling game from three aspects. First, in most games, players can purchase game coins in RMB. If a game operator publicly allows players to exchange game coins for RMB, the game can be determined to be a gambling game; second, whether the player wins or loses, the game operator as a banker can regularly obtain a certain proportion of tokens from the poker pool; third, whether there is a cap on the total bet amount and number of bets in each game.

"Virtual currency on the Playtika platform will continue to remain unconvertible into real currency." On July 31, 2016, Caesars Entertainment, the American casino giant in bankruptcy and reorganization, pointed out in its announcement that it would sell Playtika to a China consortium. "Also, the deal does not include the Caesar Entertainment World Championship of Poker or games involving real money." Since the beginning of 2015, there has been news in the industry that Caesar may file for bankruptcy protection due to high debts. Some foreign media have quoted sources familiar with the matter as saying that the purpose of bankruptcy protection is to restructure Caesar's current huge debt, hoping to reduce the debt to less than half through restructuring.

Giant Network: Playtika has no plans to enter the China market for the time

being. It is worth noting that Playtika, which Giant Network acquired through great pains, has no plans to enter the China market. The relevant person in charge of Giant Network told reporters: "After the completion of this transaction, the listed company will retain Playtika's existing business team, R & D team, management team and other employees. The existing organizational structure and management will basically remain unchanged and continue to maintain Efficient operation of various businesses and management departments. Playtika has no plans to enter the China market for the time being."

In the view of industry insider Li Linfeng, Playtika does not enter China on the one hand to ensure the independence of excellent teams. For example, Fist and Supercell are still independent after being acquired by Tencent. If they face integration after entering China, its ability to make excellent products is estimated to be reduced; on the other hand, the acquisition of overseas Playtika will facilitate Giant Network's future layout in the global market. Senior analyst Xue Yongfeng holds another opinion. He told reporters that this is a means of capital operation. It is used to increase the stock price and has not much to do with the business itself. Many listed companies use mergers and acquisitions to increase their stock prices, which is relatively normal, but this time the money is relatively large.

In addition, an analyst who declined to be named also said that many game companies now favor mergers and acquisitions of overseas assets. First, there are not many domestic targets, and secondly, overseas targets have stories to tell, which will increase stock prices. The effect is obvious.

Unknowns: Approval risks and other risks

In the reply issued by Century Cruises on the Shenzhen Stock Exchange's "Inquiry Letter on the Reorganization of Chongqing New Century Cruises Co., Ltd." on November 1, the reporter noticed that Century Cruises This transaction still has a number of approval risks, and the approval procedures that still need to be performed include: 1. The listed company's shareholders 'meeting reviewed and approved the reorganization plan and related proposals;2. The transaction was filed by the National Development and Reform Commission;3. The transaction was filed by the competent commercial authority; 4. The China Securities Regulatory Commission approved this transaction. In this regard, Century Cruises stated that the company is actively preparing relevant filing documents and will handle relevant filing matters as soon as possible; if the filing is not finally obtained from the National Development and Reform Commission or the competent commercial authority, there is a risk of terminating the transaction.

According to the provisions of Article 4 of the "Measures for the Administration of Overseas Investment" reviewed and approved by the 27th ministerial meeting of the Ministry of Commerce in 2014, overseas investment by enterprises must not "endanger the national sovereignty, security and social public interests of the People's Republic of China, or violate the laws and regulations of the People's Republic of China" and other circumstances.

In addition, according to the "Administrative Measures for the Approval and Filing of Overseas Investment Projects","For overseas acquisitions or bidding projects with Chinese investment of US$300 million or more, investment entities shall submit project information to the National Development and Reform Commission before carrying out substantive work externally. report. After receiving the project information report, the National Development and Reform Commission will issue a confirmation letter within 7 working days for projects that comply with the national overseas investment policy." So, has Century Cruises obtained this confirmation letter? In response, the reporter asked Century Cruises for information, but as of press time, there was no reply.

Industry insiders also pointed out that gambling games are sensitive areas in China. As the overall review of mergers and acquisitions tends to tighten, such underlying assets may have certain regulatory risks. However, Xue Yongfeng said that gambling games are legal abroad, and after the acquisition of the listed company is completed, all business entities are overseas and have nothing to do with the domestic market. There is no big regulatory problem.

Jin Yinsong also said that although the acquired company has gambling business abroad, the impact should not be significant because the acquired company does not break the law abroad and does not enter the China market.

In addition, this acquisition involves a large amount of foreign exchange payments. Are there any obstacles in actual operation? In this regard, Liu Liya, deputy dean of the School of Finance at Shanghai University of Finance and Economics, told reporters that companies can theoretically apply for foreign exchange quotas for overseas investment, but for larger quotas, the SAFE's approval process will be more difficult. Therefore, in practical operations, many institutions have QFII quotas, and companies can "borrow" them through cooperation. The staff member in charge of corporate business of Minsheng Bank said: "The direct remittance of (acquisition consideration) will definitely not be possible."

Editor: yvette