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UBISOFT... Deal Reporter
Ubisoft: Upcoming expiry of Vivendi standstill agreement could provide further impetus for deal
20 May 2022 | 08:35 EDT
Share price performance, recent sector activity main catalysts
Ubisoft still testing appetite for take-private
EUR 60-70 minimum acceptable offer price range – minority shareholders
The expiry of a standstill agreement between Ubisoft [EPA:UBI] and Vivendi [EPA:VIV] next year, under which the media conglomerate has committed to refrain from purchasing Ubisoft shares, could provide further impetus for a take private of the French video game developer, shareholders and advisers said.
Vincent Bollore’s Vivendi in 2018 sold its remaining 27.7% holding in Guillemot family-backed Ubisoft for EUR 2bn and agreed to refrain from purchasing Ubisoft shares for five years. The agreement, which expires in March 2023, put an end to a takeover battle for the French gaming company, in which Vivendi had built its stake since 2015.
Ubisoft’s founding family is currently assessing a partnership with a private equity group, this publication reported, with KKR [NYSE:KKR] and Blackstone [NYSE:BX] believed to be among potential suitors assessing the business.
The upcoming expiry of this agreement may have added further incentive for the Guillemot family to drive a take private deal forward on their own terms, two minority shareholders in Ubisoft said.
Potential investors and Ubisoft management have the standstill agreement deadline in mind, and it is an additional factor pushing for a deal this year, two advisers following the situation agreed.
However, the decline of Ubisoft's share price over the past few years amidst governance issues and the recent deals in the space - including the USD 74bn acquisition of Activision Blizzard [NASDAQ:ATVI] by Microsoft [NYSE:MSFT] - are the main catalysts pushing for a deal, the advisers said.
"Ubisoft is currently trading at a substantial discount to fair value and the timing of this potential transaction to take Ubisoft private is interesting for many reasons but also as the standstill agreement with Vivendi is drawing to a close and Ubisoft will want to avoid Vivendi coming back to buy shares," said Jonas Edholm, portfolio manager of SKAGEN Focus - a contrarian and value-based global equity fund that holds a 3.4% stake in Ubisoft
The French videogames specialist's shares, which stood at a peak of EUR 102 in July 2018, were trading today (20 May) at EUR 47.60, giving it a market capitalisation of EUR 5.96bn.
Ubisoft’s Chairman and CEO, Yves Guillemot, founded the business with his brothers in 1986. The Guillemot family, together with its affiliates, own 15.9% of Ubisoft’s shares and 22.3% of the net voting shares in the company, as per its latest annual report.
Ubisoft is still testing market appetite and listening to pitches while potential interested parties run the numbers on a potential take-private deal, three sources familiar with the situation said. The founding family is likely to resist strategic bidders, they reiterated.
Should a deal materialise, both shareholders highlighted EUR 60 to EUR 70 as the minimum price offer range that would be considered acceptable, and that could convince minority investors to cash out. However, EUR 100 per share is seen as the more favourable price based on its long-term prospects, they said.
“Ubisoft stock is deeply undervalued on any metric”, Edholm said. “The share price has dropped from EUR 100 over the last four years and the stock is now at an inflection point, where the company will be able to launch an impressive line-up of products and reaping the benefits from an elevated investment cycle.”
Ubisoft is a business that owns its intellectual property and franchises and is an attractive target, with much of its heavy R&D investment set to pay off in the coming years, the second shareholder agreed.
Despite the Guillemot’s preference for a private equity deal, Vivendi is in a good position to bid for the asset when the March 2023 deadline passes, the second shareholder said.
“Vivendi has the financial resources to go after something and Ubisoft is an obvious target. The Bollore Group have the optionality to sell down shares in UMB and recently sold its African logistics business for USD 6.4bn so they have a flexible balance sheet,” this shareholder noted.
A Ubisoft spokesperson declined to comment on market rumours. A Vivendi spokesperson noted that the standstill agreement is still in force and declined to further comment on market rumours.
SEC Probe Looms Over Auditors’ Fastest-Growing Businesses
Potential conflicts of interest increase as profits from nonaudit work soar
When the two top executives of a hot electric-vehicle startup made share purchases that later drew scrutiny, they were helped by accounting firm BDO USA, according to the auto company. BDO was also the auditor of the company they ran.
The dual roles that BDO played at Electric Last Mile Solutions Inc. ELMS -7.06% are typical of potential conflicts of interest faced by auditors. Relationships like this one are under scrutiny by the Securities and Exchange Commission, people close to the inquiry said.
The car maker said it took an internal probe to figure out that BDO was advising its chairman, Jason Luo, and Chief Executive Officer James Taylor. Both executives resigned and their deals for company stock are being investigated by the SEC, the company said in March.
BDO is one of several midtier accounting firms caught in a sweeping probe by the SEC into conflicts of interest by auditors, one of the people close to the investigation said. The probe also includes the Big Four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, The Wall Street Journal has previously reported.
A spokesman for BDO didn’t respond to requests for comment. BDO in filings rejected the company’s assertion that it had helped to “create and structure” the share transactions, but didn’t comment on whether it had advised the executives.
A spokesman for Electric Last Mile Solutions declined to comment, as did a spokeswoman for its former chairman Mr. Luo. Its former CEO Mr. Taylor didn’t respond to requests for comment. The SEC also didn’t respond to requests.
Electric Last Mile said its investigation found the two executives bought its stock at “substantial discounts to market value” in the late 2020 run-up to the shares becoming publicly traded, via a special-purpose acquisitions company. It accused the two men of giving responses to the investigators that are “believed to be inconsistent with documents.”
BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act might have occurred. The company decided after its internal investigation that it needed to restate earlier financial statements that were audited by BDO, in the light of the share deals the accounting firm had allegedly advised on.
The SEC investigation reflects concerns about the increasing reliance by the big accounting firms on sales of consulting and tax services, which offer higher margins and greater growth potential than their core audit business.
The Big Four between them earned $115 billion world-wide from consulting and tax services last year, more than double the $53 billion from audits, according to data provider Monadnock Research LLC. Between 2011 and 2021, the four firms grew their combined global revenues from consulting and tax work by 96%, far outstripping their 17% audit-fees increase over the same period, the Monadnock data show.
A Deloitte spokesman said the firm’s multidisciplinary approach “enables us to deliver high quality audits for the benefit of the investing public.” A PwC spokesman said “independence is core to the delivery of quality audits, at the heart of PwC’s culture and fundamental to everything we do.” Representatives of KPMG and EY declined to comment.
Accounting-industry group the Center for Audit Quality said that on average 90% of the total fees paid by an SEC-listed company to its auditor are for the audit or audit-related services. Most of the remaining fees went toward tax services.
Concerns about poor audit quality underpin reforms under way in the U.K. The Big Four firms there are splitting their audit operations from the rest of their activities, in response to demands by regulators. The measure follows a string of accounting scandals.
In the U.S., senior SEC officials have in recent months publicly warned accounting firms not to “creatively apply the [independence] rules,” and said sanctions may need to increase to deter rule breaking.
The agency’s ongoing conflicts-of-interest investigation is looking for breaches of rules banning accounting firms from selling specified services to audit clients, people close to the probe said. Accounting firm RSM U.S. was fined $950,000 in 2019 for selling services ranging from bookkeeping to lending staff during its work on more than 100 audits.
RSM said when it settled the SEC charges, without admitting liability, that it was “committed to the highest standards of integrity and audit quality.” A spokeswoman declined to comment further.
The SEC investigators are also looking at situations where the audit firm sells nonaudit services that aren’t prohibited, such as certain tax services, the people close to the probe said. Even where there isn’t a specific ban, SEC rules impose an overarching requirement on auditors to be independent “in fact and in appearance.”
In a state-court lawsuit filed in Texas in June 2020, accounting firm Ryan LLC accused EY of audit-independence violations, including auditing its own work related to tax services. Ryan says that EY performs oil and gas tax consulting similar to Ryan’s own services. EY later reviewed the tax work as part of its annual audit provision, Ryan’s lawsuit alleged, creating a conflict of interest that is prohibited under U.S. law.
Ryan didn’t name specific EY clients in its lawsuit. The Texas firm alleged that EY’s auditors improperly obtained Ryan’s methodologies for calculating clients’ severance and royalty taxes, allowing EY to market competing services.
An EY spokesman said the firm strongly disputes Ryan’s claims and is vigorously contesting them in Harris County, Texas, court. The Big Four accounting firm has sought to have part of the case dismissed and is awaiting a state appeals court’s decision on that motion. The civil case is scheduled for trial in October.
Research Calls
- Upgrades:
- Comerica (CMA) upgraded to Outperform from Neutral at Robert W. Baird; tgt $85
- Mirati Therapeutics (MRTX) upgraded to Buy from Neutral at Guggenheim; tgt $115
- Ollie's Bargain Outlet (OLLI) upgraded to Buy from Underperform at BofA Securities; tgt raised to $75
- Trex (TREX) upgraded to Neutral from Underperform at Exane BNP Paribas; tgt $75
- Downgrades:
- Freshpet (FRPT) downgraded to Neutral from Overweight at Atlantic Equities; tgt lowered to $70
- Hewlett Packard Enterprise (HPE) downgraded to Neutral from Buy at BofA Securities; tgt lowered to $16
- PPG Industries (PPG) downgraded to Hold from Buy at Berenberg; tgt lowered to $140
- Pure Storage (PSTG) downgraded to Neutral from Buy at BofA Securities; tgt lowered to $27
- Ross Stores (ROST) downgraded to Market Perform from Outperform at Telsey Advisory Group; tgt lowered to $80
- Vipshop (VIPS) downgraded to Sell from Neutral at Citigroup; tgt lowered to $7.80
- Wix.com (WIX) downgraded to Equal-Weight from Overweight at Morgan Stanley; tgt $85
- Others:
- Air Products (APD) assumed with an Outperform at Credit Suisse; tgt lowered to $290
- Bentley Systems (BSY) initiated with an Outperform at Oppenheimer; tgt $40
- Coupa Software (COUP) initiated with a Neutral at DA Davidson; tgt $75
- Diversey Holdings (DSEY) assumed with an Outperform at Credit Suisse; tgt raised to $12
- Dow (DOW) assumed with a Neutral at Credit Suisse; tgt raised to $67
- Ecolab (ECL) assumed with a Neutral at Credit Suisse; tgt lowered to $180
- ESAB Corp. (ESAB) initiated with a Buy at Stifel; tgt $56
- Inspirato (ISPO) initiated with an In-line at Evercore ISI; tgt $6
- Leafly (LFLY) initiated with an Outperform at Cowen; tgt $12
- Revolution Medicines (RVMD) initiated with a Neutral at BofA Securities; tgt $24
- TG Therapeutics (TGTX) initiated with an Underperform at BofA Securities; tgt $5
- Turning Point Therapeutics (TPTX) initiated with a Buy at BofA Securities; tgt $58
Gapping down
In reaction to earnings/guidance:
- ROST -27.7%, BAH -4.8%, DE -3%, AMAT -1.1%
Other news:
- FHTX -15.5% (provides update on Phase 1 study of FHD-286; FDA initiates partial clinical hold)
- BURL -11.4% (in sympathy with weak ROST earnings)
- TJX -3.7% (in sympathy with weak ROST earnings)
- ATRA -3.1% (ATRA says Bayer (BAYRY) intends to end licensing agreement for next-gen mesothelin-directed CAR T-cell therapies)
- KSS -2.3% (Macellum Issues Statement Regarding the Kohl's Board's Apparent Breach of Fiduciary Duty and Failure to Disclose Material Information Prior to 2022 Annual Meeting)
Analyst comments:
- PSTG -1.9% (downgraded to Neutral from Buy at BofA Securities)
- HPE -1.4% (downgraded to Neutral from Buy at BofA Securities)
- WIX -1% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- FRPT -0.7% (downgraded to Neutral from Overweight at Atlantic Equities)
Gapping up
In reaction to earnings/guidance:
- DECK +14.6%, PANW +12.3%, FL +4.8%, FLO +3.7%, AINV +3.5%, VFC +3.1%
Other news:
- CDXC +10.2% (to launch commercial joint venture in mainland China)
- NIO +8% (officially listed on the main board of the Singapore Exchange)
- ALLK +6% (files for $250 mln common stock offering)
- CRWD +5.1% (in sympathy with strong PANW earnings)
- ANIK +5% (receives FDA 510(k) clearance for the X-Twist knotless fixation system expanding its sports medicine soft tissue portfolio)
- ZS +4.9% (in sympathy with strong PANW earnings)
- MAXN +3.8% (appoints Philippe Costemale as New COO)
- FTNT +3.6% (in sympathy with strong PANW earnings)
- MRTX +3.2% (submits marketing authorization application for adagrasib to the EMA; also upgraded to Buy from Neutral at Guggenheim)
- LPLA +2.9% (reports activity highlights for April)
- DASH +2.9% (authorizes new $400 mln share repurchase program)
- CVLG +2.9% (names new CFO; also announces new $75 mln stock repurchase auth)
- BBIO +2.7% (Affiliate Phoenix Tissue Repair Announces Positive Results from Phase 2 Trial of PTR-01)
- SLQT +2.5% (CFO to step down)
- OKTA +2.5% (in sympathy with strong PANW earnings)
- ARNC +2.5% (to pursue the sale of its Russian operations)
- SEDG +2.3% (SEDG and Huawei agree on global patent license agreement)
- MTCH +2.3% (withdraws temporary restraining order in response to (GOOG / GOOGL) concessions)
- DVN +2% (ENLC DVN and MPLX to move forward with construction of Matterhorn Express Pipeline)
- MPLX +1.8% (ENLC DVN and MPLX to move forward with construction of Matterhorn Express Pipeline)
- MYE +1.5% (CFO to step down)
- EQH +1.3% (increases dividend)
Analyst comments:
- OLLI +6.4% (upgraded to Buy from Underperform at BofA Securities)
- TREX +3.1% (upgraded to Neutral from Underperform at Exane BNP Paribas)
- APD +1.7% (assumed with an Outperform at Credit Suisse)
- CMA +1.3% (upgraded to Outperform from Neutral at Robert Baird)
Early premarket gappers
- Gapping up:
- DECK +13.7%, CDXC +13.1%, RDUS +11.3%, PANW +11.2%, CRWD +5.5%, ALLK +5.3%, ZS +5.3%, FTNT +4.3%, NIO +4.1%, MAXN +3.8%, FLO +3.7%, DASH +3.6%, AINV +3.5%, LPLA +2.9%, CVLG +2.9%, DVN +2.8%, ARNC +2.5%, VFC +2.5%, OKTA +1.8%, SEDG +1.5%, MPLX +1.1%
- Gapping down:
- ROST -27.7%, FHTX -24.9%, BURL -8.3%, ATRA -3.5%, TJX -3.3%, AMAT -1.8%, EVLV -0.5%