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Leader in Emerging E-Sports Space Separates Traditional TV Broadcasting Segment

Global digital entertainment business Modern Times Group AB (MTGB SS) prepares to finalize the distribution of its traditional broadcasting business Nordic Entertainment Group AB (NENTB SS) following a failed sale of the segment. This is the second stage in the cross-ownership situation that saw Kinnevik AB (KINVB SS) divest its holdings in MTGB, thus allowing latter's separation of NENTB and continued evolution into a pure-play e-sports leader.

What's Interesting? The Edge Intelligence...
Swedish entertainment company Modern Times Group AB (MTGB SS) will separate its traditional broadcasting business Nordic Entertainment Group AB (NENTB SS) from the rest of its e-sports and online gaming business on March 28, 2019. This move will transform MTGB (Parent ex-Spin) into a pure-play global digital entertainment business with leadership in e-sports (ESL & DreamHack; FY18 revenue of SEK 1,520m, 37.8% of total) and online gaming (Innogames & Kongregate; FY18 revenue of SEK 2,296m, 57.0% of total). We believe e-sports and online gaming is a high-growth business, with an overall growth profile of 41.2% in FY18 over the same period last year.

With e-sports expected to grow by a CAGR of +26%, we’re seeing more companies not only enter this space but list these companies onto the market, in this case via a Spinoff. The e-sports business is currently going through a lot of traction and these companies (mostly private) are attracting high valuations (more than 10x of their revenues), like Cloud9 and TeamSoloMid, valued at $310m and $250m with FY18 estimated revenues of $22m and $25m (respectively). Following the separation, MTGB (ex-Spin) will be the only pure-play publicly listed company with leadership in the e-sports space (FY18 revenues of SEK1,520m ($162m), 37.8% of total). This therefore offers a compelling early-stage investment opportunity.

On the other hand, NENTB (Spinoff) will be a stable cash flow generating business, with a promised dividend pay-out of 30% to 50% of its adjusted net income. Furthermore, this Spinoff transaction came about after the sale of the NENT segment fell through to Danish Telecom Group, TDC A/S (TDC DC) for $2.5bn in February 2018, when TDC A/S itself was approached with a takeover bid by Macquarie Infrastructure and a group of Danish pension funds (ATP, PFA and PKA). TDC A/S accepted the deal, which in turn canceled the purchase of NENT.

The Edge View (MTGB SS, Parent)...
MTGB (ex-Spinoff) is an early-stage high-growth e-sports and online gaming business with an expected cash-in-hand of SEK 1.8bn (by Q2 2019, after the Nova sale is completed) indicating a strong financial position ahead. Additionally, the cash will boost MTGB’s Venture Capital (VC) fund (which targets 8 to 10 minority investments each year) and provide a competitive advantage in changing the gaming and AR/VR space. As highlighted above, e-sports companies (mostly private) are receiving high valuations and MTGB SS (ex-Spin) holds a leadership position.