TheChek News Flow

French group behind ‘Assassin’s Creed’ bets Microsoft cloud deal will revive its fortunes

Streaming will transform the video games industry just like Netflix revolutionised television and cinema, according to the head of Ubisoft, after the French company struck a transformational cloud-gaming deal with Microsoft.

Ubisoft, the creator of console franchises including Assassin’s Creed and Tom Clancy’s Rainbow Six, last month agreed to acquire streaming rights for Activision Blizzard’s portfolio of games as part of Microsoft’s bid to secure regulators’ approval for its $75bn takeover of Activision. 

“When Netflix first said it was going to go into streaming, their shares fell a lot and they were widely criticised,” Ubisoft chief executive Yves Guillemot told the Financial Times.

“Today we see what they have become,” he added. “It’s going to be the same with video games but it will take time. But when it takes off, it will happen very quickly.”

News of the Microsoft deal sent Ubisoft’s stock up by as much as 9 per cent in a single day. Nonetheless, its shares have lost almost two-thirds of their value since their most recent peak in early 2021, following a series of delayed launches, underperforming game releases and slow uptake on its subscription service, Ubisoft+.

So far, cloud gaming has been slower to take off than many in the industry had predicted owing to both technical and business challenges. A year ago, Google shut down its ambitious Stadia cloud gaming service after it struggled to attract users.

Omdia, a research group, estimates that cloud gaming-enabled services, such as Xbox Game Pass Ultimate and PlayStation Plus Premium, will generate $3.2bn in 2023, making up just 2 per cent of total consumer spending on games. Analysts predict that figure will at least double over the next five years.

Ubisoft is more optimistic.

“We strongly believe in the next five to 10 years, many games will be streamed and will also be produced in the cloud,” Guillemot said. “That’s what pushed us to go forward with the [Microsoft] deal.”

Microsoft’s move to hand off a large portion of Activision’s cloud gaming rights to Ubisoft won its $75bn deal an initial nod from the UK’s Competition and Markets Authority last week. Approval would pave the way for the gaming industry’s biggest-ever acquisition to be finalised next month. A final decision from the UK regulator is pending.

Guillemot would not disclose financial details for the streaming deal, which will involve a “one-off payment” to Microsoft to acquire cloud gaming rights outside the European Economic Area for all Activision’s hit games, including Call of Duty, over the next 15 years. 

Guillemot said those streaming rights — plus the launch of more powerful mobile technology such as Apple’s latest iPhone 15 — will be key to increasing Ubisoft’s market penetration in fast-growing regions outside Europe and the US, where console gaming is not as entrenched.

“Countries that need to progress very quickly often jump to new technologies and skip old methods of the old systems,” he said, pointing to African adoption of mobile payments. “So we think that [these regions] will move more quickly to streaming and the cloud than others.”

Paris-based Ubisoft is emerging from a few troubled years, as net bookings fell and debt ballooned. In 2020, the company also faced allegations of sexual harassment and poor HR processes, leading to several high-level dismissals. 

“It had a big impact,” Guillemot said of the sexual misconduct allegations. “We had systems that were not efficient enough.”

The company is betting that big game launches this year, such as Assassin’s Creed Mirage in October, increasing resources focused on its most successful franchises and a $200mn cost-cutting programme will turn things around. 

Some analysts have predicted that Microsoft’s long-awaited completion of its Activision acquisition will trigger a new wave of games industry consolidation. Ubisoft, which is one of the largest standalone games publishers, has been seen as a potential target.

Family-run Ubisoft has forged a partnership with China’s Tencent to fortify itself against takeover attempts. A deal last year to increase Tencent’s stake in the Guillemot family’s holding company bolstered the partners’ control over the group. The $300mn capital injection gave Tencent and the Guillemot family together 25 per cent of the share capital and 30 per cent of voting rights, but dashed investor hopes that Ubisoft could be bought. 

Guillemot said there “may be possibilities” to increase that stake in the future but they are limited to that 30 per cent ceiling today. “We wanted to work with Tencent to ensure that the board had good control of the company’s capital. But that doesn’t stop the board from listening to proposals,” he said.

Drive to minimise borrowing costs fuels issuance of debt typically dominated by junk-rated companies

High-grade US companies are piling into the convertible bond market — typically the preserve of junk-rated issuers — as they try to minimise rising borrowing costs caused by the Federal Reserve’s aggressive campaign of interest rate rises.

Investment-grade borrowers have sold $12bn of convertible bonds so far this year, more than 30 per cent of total issuance, according to data from Bank of America — the highest share in at least a decade and three times the average rate. Highly rated companies sold just $2bn of so-called converts in 2022, or 7 per cent of the overall market.

“We’re seeing a lot of companies who would traditionally be straight debt issuers come to the convertible market,” said Jesse Mark, global head of equity capital markets at Jefferies.

Convertible bonds are a type of debt that can be swapped for equity if a company’s shares rise to a specific price. They allow companies to borrow at a cheaper rate than a traditional bond, without the immediate dilution that would come through selling new stock.

The market has traditionally been dominated by growth-focused companies that have optimistic long-term forecasts but want to minimise their short-term interest expenses. 

At the height of the equity market boom in 2021, companies such as Airbnb, Peloton and Beyond Meat were able to use convertibles to borrow at zero per cent interest. More than half of issuance that year came from the tech sector, according to data from Jefferies. 

However, with average yields for investment-grade bonds rising to almost 6 per cent, even companies in more staid industries such as utilities, real estate and industrials are turning to the convertible market to keep costs down, with tech accounting for less than a quarter of deals.  

“Investment-grade companies need to save on coupons as well,” said Michael Youngworth, convertible bond strategist at BofA Securities. “They’re obviously plagued by the same higher financing cost backdrop that high-yield companies are.”

Investment-grade companies that have tapped the convertible market in recent months include CenterPoint Energy, Corporate Office Properties Trust and infrastructure investment group HASI.

Youngworth said that companies saved an average of 2 to 3 percentage points on their interest rates by issuing a convertible compared with a traditional bond.  

Overall convertible issuance has picked up pace in the past few months as more companies approach refinancing deadlines and as rising stock prices reduce the risk for companies of diluting their existing shareholders at low conversion prices. 

Companies have raised $6.3bn so far in September, according to data from Dealogic, which together with a $7.9bn haul in August puts the asset class on course for its busiest two-month streak since 2021 in terms of both dollar volume and number of deals. 

About $2.3tn of corporate debt is set to mature each year between 2024 and 2026, according to data from S&P Global Ratings. Analysts and market participants predicted that the impending wave of maturing debt would encourage further growth in convertible volumes. 

Until recently, chief financial officers had “the luxury of time”, Youngworth said. But now, “companies are starting to need to refinance ahead of an upcoming maturity hurdle”, with many having to pre-fund their maturing debt 12 to 18 months in advance, he added.

Disney and Comcast prepare for battle over the price of full ownership of the streaming service

In February, Disney chief executive Bob Iger surprised employees and investors by saying that “everything is on the table” regarding the future of Hulu, adding that its content was “undifferentiated”.

Many assumed Iger was ready to jettison the streaming service. But just three months later, Iger said his remarks had been “a little harsh,” insisting he was planning to keep Hulu and integrate it with the Disney+ app.

By early next year, Iger will have discovered how much the decision to hold on to Hulu, home to shows such as Only Murders in the Building and The Bear, is going to cost him. On September 30, Iger’s team will begin a months-long process with Comcast to determine the value of the cable giant’s minority stake in Hulu, setting the stage for Disney to purchase it and gain full ownership.

Disney and Comcast have been in an uneasy relationship over Hulu since 2019, when Iger’s company gained a 66 per cent stake in the streaming service through its acquisition of 21st Century Fox. Comcast holds a 33 per cent stake, and the two companies agreed at the time that either could initiate a sale or purchase of all of Hulu at a minimum valuation of $27.5bn. 

The process of determining the value of Comcast’s stake was expected to begin sometime next year, but the companies recently agreed to start it sooner. Wall Street analysts admit they have no idea how it will play out, but the consensus is that Disney will end up having to pay at least $9bn for the 33 per cent stake — and possibly much more.

Brian Roberts, Comcast’s chief executive, called Hulu a “kingmaker’s asset” at a Goldman Sachs conference this month. He argued that Hulu’s value has increased significantly since 2019, and suggested that a fair price would be around $60bn thanks to potential synergies and a reduction in customer “churn” if it is bundled with Disney+, its flagship streaming service.

“Hulu is a great business,” Roberts said. “I think if we’re selling all of this as-is there would be a line of bidders around the block.”  

However, Disney will want the Hulu value to be set as close to the $27.5bn “floor value” as possible, analysts say. “Any payment above this level may put pressure on Disney’s equity,” Citi analyst Jason Bazinet wrote in a recent research report. “Hulu’s valuation is apt to make someone disappointed: either Disney will pay more than investors want, or Comcast will receive less than investors expect.”

Reaching an answer to this dilemma is expected to take at least until the end of this year, following two — and probably three — appraisals of Hulu’s value.

Both companies will appoint an investment bank to act as an appraiser. If the two sides arrive at a price within 10 per cent of each other, Hulu’s value will be set at the average of the two figures. Analysts see this as an unlikely outcome, given the difference expected between the values assigned by the two companies’ bankers. 

If they fail to settle on a price through the first process, then a third bank will be hired to come up with a value for Hulu. In that case, the final value would be the average of the two closest of the three estimates.   

“There is a wide range of valuation outcomes given the unique nature of Hulu as a business and the role of what will likely be three arbitrator valuations to deliver the final value,” Morgan Stanley analyst Benjamin Swinburne wrote in a research report.  

Jonathan Chaplin, an analyst at New Street Research, said in a report that “both parties have an incentive to deliver a reasonable valuation [since] the outlier among the three valuations will be discarded”.

Chaplin said “we don’t know where this will land,” but added that he expected the number to be higher than the $27.5bn floor value because that would “assume no change in value and no synergies for Disney”.

The stakes are high for Disney, which would need to raise money to buy out Comcast’s stake through a debt offering if the valuation goes above $29.5bn, according to Citi estimates. With Disney’s shares trading near a five-year low, it is unlikely to pay by issuing stock. At the end of the most recent quarter, Disney had $11.5bn in cash on its balance sheet.

Investors have already shown some concern about Disney’s cash flow, analysts said. Last week, Disney said it would double its spending on its theme parks to $60bn over the next decade. The shares dropped after the announcement due to investor concerns about potential pressure on Disney’s free cash flow until those investments start to pay off. Iger has also pledged to start paying a small dividend by the end of this year.

Comcast has said it will use any proceeds to buy back its shares. 

Iger and Roberts, both long-serving media chiefs, have competed against each other for decades.  

Roberts made a failed hostile bid to buy Disney in 2004, when Iger was president and chief operating officer. In 2018, Roberts offered Rupert Murdoch a higher price for 21st Century Fox than Iger had already made, forcing the Disney chief to raise his bid significantly. The bidding war pushed the final price paid by Disney to $71bn, a sum that has been criticised by some shareholders as too high.  

The Hulu negotiation comes as Iger is seeking to cut costs and exit declining businesses. Disney’s streaming business is expected to lose money until 2024, and Iger has floated the idea of selling Disney’s traditional TV assets such as the ABC network. He has also acknowledged that some of Disney’s movie studios need to regain their creative spark. 

Disney and Comcast declined to comment. 

Disney does not break out Hulu’s profitability, but in its most recent quarter the streaming service’s operating income and revenues grew thanks to higher prices and an increase in its number of subscribers. 

Hulu had 48.3mn subscribers in the third quarter — up from about 30mn in 2019 — with average monthly revenue for each subscriber rising to $12.39 from $11.73 thanks to price hikes. Hulu’s average daily engagement is second only to Netflix, according to Morgan Stanley and Nielsen. 

Roberts argues that Hulu has appreciated in value since 2019, despite the turn in investor sentiment against streaming.

“The company is way more valuable today than it was then,” Roberts said at the Goldman conference. “We are excited to get this resolved.”

Owners of Tom Brady-backed football club say truncating rail line will shake investor confidence

Rishi Sunak has been warned by the new US owners of Birmingham City football club, in which NFL superstar Tom Brady has a minority stake, that he will damage trust in Britain if he aborts the HS2 high-speed rail project.

Tom Wagner, the club’s chair, wrote to the prime minister to warn that truncating HS2 would hurt Birmingham’s economy and shake investor confidence in government promises.

“The expectation is that the government will honour its commitment to deliver on publicly stated long-term plans,” Wagner said in a letter seen by the Financial Times.

“Any deviation could result in a loss of investor trust and this would have a considerable negative impact on the UK. The ambitious HS2 project falls into this category.”

Wagner joins a chorus of business and political criticism after government officials confirmed Sunak is considering axing the HS2 route from Birmingham to Manchester and terminating the southern section at Old Oak Common, a London suburb.

Wagner cited the planned HS2 route to Birmingham as a key factor in the decision by US hedge fund Knighthead Capital Management, where he is managing member, to invest in the football club.

He argued fast rail connections to Birmingham are a vital part of his plan to turn the second-tier football club into a major force in the game. Brady’s involvement has generated massive global interest.

Earlier this year the hedge fund took day-to-day control of Birmingham City after buying a 46 per cent share of the club and making a full purchase of its 29,000-seater stadium.

Brady, who retired from playing this year, is the most successful quarterback in NFL history. He took a minority stake in the club and became chair of its advisory board.

A Downing Street spokesperson on Monday did not deny that Sunak is close to axing the Birmingham-Manchester phase of HS2, after chancellor Jeremy Hunt said costs on the project are “totally out of control”.

The prime minister is expected to reassign HS2 spending to a package of other transport improvements including better bus services, light rail and tram schemes as well as an improved “Northern Powerhouse Rail” east-west scheme from Manchester to Leeds.

In the meantime Sunak is under mounting pressure to relent, with politicians such as George Osborne, former chancellor, and Michael Heseltine, former deputy prime minister, saying that truncating the project would “become an international symbol of our decline”.

Business leaders have also mobilised. “Once again the north has been promised the earth but all it seems we’ll get is scorched earth,” said Chris Fletcher, policy director at the Greater Manchester Chamber of Commerce.

One person close to the management of Birmingham airport said: “It’s very short-sighted to chop off the Manchester end. In 50 or 60 years’ time, people will not remember the overspend, they will remember what this government did to give them and future generations opportunities.”

Melanie Smith, chief executive of the NEC Group, the events business that owns the National Exhibition Centre in Birmingham, said: “This is a once-in-a-generation opportunity to drive economic growth and prosperity for the country and we need to maximise its potential.”

Defence secretary Grant Shapps on Sunday defended plans to change “the sequencing of that expenditure”, raising speculation that the northern leg of the project could be delayed rather than killed.

But one official said: “The prime minister is making a virtue of making decisions, that suggests it won’t just be another fudge.”

The looming decision is awkward given that Sunak is hosting his Conservative party’s conference in Manchester this weekend. Downing Street declined to say if he would travel to the event by train.

Sunak, interviewed by broadcasters on Monday, said he was still “committed to levelling up” despite the speculation hanging over Britain’s biggest single levelling-up scheme.

“Transport infrastructure is a key part of that, but not just big rail projects, but also local projects, improving local bus services, fixing pot holes, all of these things make a difference in people’s day-to-day lives,” he said. 

The announcement on the fate of HS2 was not due until the autumn but officials and ministers have moved to finesse the details in the past two weeks since a long-lens photographer spotted a civil servant holding a secret HS2 cuts document.

Beauty company’s return to city of its founding seen as a vote of confidence in leadership of Sue Nabi

Heavily indebted cosmetics maker Coty will sell 33mn new shares as part of a plan to seek a dual listing in Paris, hoping that a foothold on the French exchange will boost its profile with beauty-focused investors.

The maker of cosmetics lines including CoverGirl and Maxx Factor will offer the shares to investors globally, the company announced on Monday. Stock will be available to the public in the US and through private placements on the professional segment of Paris’s Euronext exchange for the first time, subject to approval from France’s market regulator.

Coty first announced it was examining a dual listing in May to add to its current presence on the New York Stock Exchange, where it first went public in 2013. At the time the company said it wanted to tap pools of European investors and sector expertise in a market that is also home to L’Oréal, the world’s biggest beauty company by sales.

The expanded offering to investors is a show of confidence in a turnaround of the business under the leadership of Sue Y Nabi, a beauty veteran who was hired in 2020 to revamp operations as the fifth chief executive in as many years.

Coty had been struggling with management churn and heavy debts but, since she took over, the share price has nearly tripled in value from lows below $4 to more than $11.80 today.

The decision to explore a dual listing earlier this year was supported by the beauty company’s controlling shareholders, JAB Investments, which is backed by the German billionaire Reimann family.

BNP Paribas, Crédit Agricole, Citigroup and Santander are jointly acting as bookrunners for the offering. Coty said it would use the proceeds to pay down debt and for strategic investments in the business.

Founded in Paris in 1904, Coty now owns more than 70 brands including the beauty licenses for fashion houses owned by French groups LVMH and Kering. Under Nabi, Coty has expanded its higher-end beauty ranges while working to improve performance at its struggling mass-market cosmetics division.

Last year it reported its first profit in half a decade and said it was on track to hit a target to reduce its leverage ratio to three times ebitda by the end of 2023.

Report comes as hopes for congressional deal to avert crisis fade

A US government shutdown would threaten the country’s triple A credit rating, Moody’s warned on Monday, amid a stand-off in Congress that risks leaving the federal government without funding.

Moody’s, the last major rating agency yet to have downgraded the US’s debt, on Monday said a shutdown would be “credit negative for the US sovereign”.

The warning came as congressional leaders and White House officials warned a shutdown was growing likely unless a rightwing flank of House Republicans compromised with their own party’s leadership and voted to continue funding the government.

A shutdown could go into effect as early as this Sunday, furloughing millions of workers and bringing a halt to parts of the federal government.

Moody’s report on Monday was not an official ratings decision, and the group said any shutdown would likely be short, and leave government debt service payments unaffected.

But a shutdown would “underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns” and show “the significant constraints that intensifying political polarisation put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability”.

The current budget dispute comes on the heels of a prolonged political battle over raising the US debt ceiling, or borrowing limit, earlier this year.

In August, Moody’s rival Fitch Ratings cited an “erosion of governance” as it stripped the US of its triple A rating, triggering a sell off in equity markets. S&P cut its US rating after a budget fight and government shutdown in 2011.

Lower credit ratings typically raise a country’s borrowing costs, although the previous downgrades by Fitch and S&P left little impact. There was no immediate market reaction following the publication of Moody’s report on Monday.

Any government funding deal needs to be approved by both the Republican-controlled House of Representatives and the US Senate, which the Democrats control by a razor-thin margin.

While a majority of senators have signalled support for a short-term measure, known as a continuing resolution, to keep funding the government, several hardline House Republicans who are calling for deep spending cuts have rejected a compromise.

Republican House speaker Kevin McCarthy on Monday insisted a shutdown could be avoided. “Why would they want to stop paying the troops, or stop paying the border agents or the Coast Guard?” he said, referring to the holdouts in his own party. “I don’t understand how that makes you stronger.”

But his comments were undercut by former president Donald Trump, the current Republican primary frontrunner, who used a social media post to encourage Republicans to follow through with their shutdown threat, saying public blame would fall on President Joe Biden.

White House press secretary Karine Jean-Pierre responded on Monday, saying that it would be a “Republican shutdown”. She added: “Extreme House Republicans . . . are marching us towards a government shutdown that shouldn’t be happening.”

Lael Brainard, the director of the US’s National Economic Council, also sought to pin the blame for any shutdown on Republicans, saying that Moody’s statement “underscores that a Republican shutdown would be reckless, create completely unnecessary risks for our economy, and lead to disruptions for communities and families across the country”.

Jakarta unhappy it was shut out of British share of €3.6bn deal after helping Serious Fraud Office with investigation

Indonesia has vowed to sue the UK for a share of a record €991mn bribery settlement struck with European aerospace group Airbus, a move that ramps up the pressure on the British government to resolve the dispute.

The UK, along with the US and France, reached the deal in 2020 after the aircraft maker admitted to offences spanning multiple countries, including kickbacks to executives at Indonesia’s state-owned airline Garuda.

Jakarta has long complained that it was shut out of the settlement, despite helping the UK’s Serious Fraud Office — the lead agency investigating Airbus’ dealings with Garuda — with the probe.

Yasonna Laoly, Indonesia’s minister for law and human rights, told the Financial Times the country would sue the UK to annul the settlement and force a renegotiation that would give Jakarta a share of the fine.

The statement follows increasing frustration in the Indonesian government over what it has called the lack of engagement from London, despite several attempts to get the British government to engage.

Indonesian officials said Laoly sought to discuss the issue with his British counterpart on a visit to London in July but his direct UK equivalent at ministerial level was on holiday.

“We are extremely disappointed that our request has not received appropriate attention,” Laoly said in a statement. “We will file our claim to the English court with the purpose to annul the DPA [deferred prosecution agreement] . . . and renegotiate and conclude [a] DPA that includes the rights of the victim state.”

He added that Indonesia had contributed “crucial evidence” to the UK investigation into Airbus, which had helped to secure the DPA.

Indonesia’s intention to bring a claim was intended to show that it is “serious”, said Cahyo Muzhar, Indonesia’s director-general of legal administrative affairs. “They think that we won’t go to court. I think they will be a little bit shocked. This is the last thing that they expect to come from Indonesia.”

As part of the stand-off, Indonesia continues to refuse requests from the SFO for help in a separate investigation into Canadian aircraft maker Bombardier until the Airbus case is addressed. 

Indonesia’s promise to take the dispute to court comes just months before a key meeting of the United Nations Convention on Corruption, where the question of compensation for victim states is due to be hotly debated.

Many countries are unhappy about the outcome of foreign bribery probes led by western countries as they are often settled through corporate plea bargains. A study in 2021 by the UN’s Office on Drugs and Crime found that less than 1 per cent of those non-trial settlements had been returned to affected countries.

“It is increasingly untenable for the UK Treasury to pocket large fines in foreign corporate bribery cases, particularly in cases where the victim state has contributed evidence,” said Sue Hawley, executive director of Spotlight on Corruption, the anti-corruption charity. “Failure to pay compensation will impact our ability to have meaningful anti-corruption partnerships in developing countries.”

In 2020, Airbus agreed to pay regulators in the US, UK and France a total of €3.6bn, the largest global foreign bribery settlement on record at the time. The UK’s share included penalties for corruption and bribery in Indonesia. Airbus’s three-year probation period under the terms of the DPA struck with the SFO ended in January this year.

The UK government said it was “committed to its international obligations, in line with due process”. The two governments have a “strong track record of co-operating and a highly valued partnership in tackling international criminality,” it added. The SFO and Airbus declined to comment.