Welcome to Embracer Group Press Conference regarding this morning's announcement. During the questions and answer session, participants are able to ask questions by dialing pound key five on the telephone keypad. Now we'll hand the conference over to CEO Lars Wingefors and Group CFO and Deputy CEO Johan Ekström. Please go ahead.
Thank you, Einar, and hello and welcome everyone to this conference call. So I'm really glad and pleased this morning to announce the divestments of Gearbox Entertainment for a consideration of $460 million to Take-Two Interactive. This is a strategically important transaction that, upon closing, will significantly reduce Embracer's net debt, earnout obligations, and CapEx. We are retaining a number of selected companies, including Gearbox Publishing San Francisco that holds the publishing rights to Remnant and the upcoming title Hyper Light Breaker, amongst other titles. We're also retaining Lost Boys Interactive, Cryptic, and Captured Dimensions. Looking strategically, this is a very important step in transforming Embracer into the future, with notably lower net debt and improved free cash flow going forward. This is also the final structured divestment under the restructuring program that now is ending March 31.
The transaction reduces the business risk and improves profitability as Embracer transitions to become a leaner and more focused company. Looking to the actual transaction and the process of divesting Gearbox, we have been running this process since last summer, and we've been evaluating many different options for Gearbox. We believe we have found a solution that is in the best interest of all stakeholders. Johan.
Thank you, Lars. Let's have a look at the key components of the transaction from a financial perspective. The purchase price on a cash and debt-free basis, and assuming a normalized level of working capital, amounts to $460 million or SEK 4.9 billion and will be subject to adjustments by customary purchase price mechanics. The consideration at closing will be paid 100% in newly issued Take-Two shares. Embracer's intent is to sell these shares to receive cash proceeds soon after closing. Closing is expected in the first quarter of fiscal 2024/25, ending June 2024. Following purchase price adjustments, transaction costs, share sell-down, and earnout settlements, the expected net cash proceeds amount to approximately $300 million-$330 million, or SEK 3.2 billion-SEK 3.5 billion. Cash earnouts will be reduced by SEK 1.6 billion compared to the group total of SEK 6.3 billion as of 31 December 2023.
The total maximum of approximately 30 million B-shares in share earnout obligations, approximately 18 million B-shares, will be reduced. In connection with closing, the remaining approximately 12 million B-shares will still be issued as settlement for certain earnout obligations. This next slide shows the relevant financials for the calendar year 2023 and prior to any potential effects of the ongoing restructuring program initiated after December 2023. Looking at the divested assets, it is worth noting that they account for a limited part of the consolidated adjusted EBIT at 0.5%, and that the transaction will have a positive impact on free cash flow generation as the EBITDA for the divested assets amounted to SEK -0.8 billion. Run-rate CapEx will be reduced immediately following the transaction as the CapEx amounted to SEK 0.9 billion for the period.
Embracer's headcount will be reduced with more than 1,300 people, and the book value of ongoing game development will be reduced with SEK 990 million, while we are retaining a book value of SEK 580 million. Looking at the financial impact, we note that net debt will be reduced by approximately SEK 3.2-3.5 billion in connection with closing. Cash earnout obligations will be reduced by approximately SEK 1.6 billion. The combined reduction of net debt and cash earnout obligations is approximately SEK 4.8-5.1 billion. Yearly CapEx will at closing be reduced by approximately SEK 0.8 billion based on the annualized Q3/2023/2024 run rate. As we saw on the previous slide, the transaction is expected to immediately be accretive to free cash flow generation.
If closing would have occurred on 31 December 2023, the transaction is estimated to have created a non-cash net expense of approximately SEK 1 billion-SEK 1.3 billion. That being said, I hand it over back to you, Lars.
Thank you, Johan. And finally, let's look at the studio and asset split post-transactions. So again, we are retaining the team of Gearbox Publishing business in San Francisco, including the Remnant franchise on publishing, the upcoming Hyper Light Breaker, and the number of other unannounced game releases that we are excited around. We're also keeping the Cryptic business with Neverwinter Online and Star Trek Online, as well as the Lost Boys Interactive and Captured Dimensions business. All companies will be cash flow positive next financial year and onwards. The divested assets include the Gearbox teams in Frisco, Montreal, and Quebec. And that transaction includes the full ownership of the Borderlands franchise, the Tiny Tina's Wonderlands franchise , Homeworld, Risk of Rain, Brothers in Arms, and Duke Nukem. So with that said, I would like to hand back to you again, Einar, for Q&A.
Thanks. If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. The first question comes from the line of Erik Lindholm-Röjestål from SEB. Please go ahead. Your line is open.
Yes. Good morning, Lars and Johan. A couple of questions from us at SEB in 5A. If we start on EBITDA minus CapEx, sort of thinking about EBITDA minus CapEx here, if my calculations are correct, you have roughly EBITDA minus CapEx of SEK 5 billion now pro forma, and CapEx has, of course, gradually come down throughout the year. I mean, is it fair to say that we should expect growth from this SEK 5 billion number now looking ahead? I'll start there. Thank you.
Hello, Erik. I think it's fair to assume that we still would have a growth CapEx in Embracer going forward that will drive growth and profitability in the business ahead. As you know, we had completed games in the value of SEK 3.2 billion in the past 12 months, and we're still expecting to have a growth in that number ahead. However, we will come back to the market later with more details. Obviously, we have our Q4 reporting coming up end of May.
Okay, perfect. So that you expect is it fair to say that you expect growth in that SEK 3.2 billion number of completed games also for the next financial year or the next fiscal year, or is it more looking a couple of years ahead?
I think in general, I think it's important to look on the long term here, and we are still expecting to have a growth CapEx going ahead. At the end of the day, it's not the value of the completed games that matters. It's the actual performance of the completed games that matters in terms of revenues and profitability. We expect our pipeline to be more focused around the titles we believe the most in that we believe have a potential to have a much better return on investment than the pipeline we had in the previous year or years.
All right. Yeah, thank you, Lars. And then another question. You say that this is the final structured divestment process for Embracer. Can you talk a bit about what kind of drives this thinking? Is it mainly due to your confidence in sort of free cash flow generation of Embracer looking ahead being much better, or what is driving this thinking?
No, I think we have taken, obviously, two very important milestones into the future with the divestment of Saber and Gearbox. As we said, this is the final structured divestment process under the restructuring program. Now we are ending the restructuring program end of March, and we are now looking into the future. So, I think I will end that there.
All right. A final question from me. If you think about the assets that you're divesting now, would you say that these assets are very similar to the assets that you acquired when you made the original purchase of Gearbox in 2021? And is it sort of fair to say that the upfront purchase price that you are being paid now is actually higher than the price you paid a couple of years ago, or is that a fair way to look at it?
Talking about the purchase price, I think we disclose numbers. It's kind of, it's depending how you look at that. Obviously, it's how you look at the share price at the time of acquisition and the share price today. I let you and the readers make that calculation on their own. I think, obviously, just taking a step back here, I think it's important to understand why we acquired Gearbox and what the plan were when we acquired Gearbox. I think Gearbox is, again, one of the best developers in the world. But they had the ambition to entertain the world and grow their business significantly, both by publishing other game titles as well as creating more new titles on their own. That was a very ambitious growth business plan over the coming six years we agreed into.
They were in the middle of that, which meant we had a significant growth CapEx that created a negative cash flow. It also added a lot of business risk into that pipeline. Because yes, they had a very good success of Borderlands, but obviously, we had a number of titles that have not been released yet and proven yet. And now, in the current environment, we decided that this is the best outcome because we need to reduce our CapEx significantly and reduce our business risk. We're not making this deal because we are unhappy with the development team of Gearbox. But in this current environment, this is the absolute right decision strategically for us to take. It's also very important to remember that the value creation of Borderlands for most always has been with Take-Two Interactive.
When looking into the future, we would like to focus around IPs and products where we capture most of the economic upside when we deploy capital and deploy our most valuable assets, meaning our games developers. I think looking at a deal, you also need to look at the deal. What's our real economic upside on the Gearbox pipeline if we were to retain them? We're fairly limited. The economic upside were really on the success of the remaining new IPs and other pipeline that were unknown to us, that also were very high business risk to complete. It's also a fact that North American games development are significantly higher than the rest of the world and has increased in the past years.
Meaning, if you do AAA games development in North America, you really need to make sure that the investments you're making are really on the top-end IPs to have a manageable business risk. All these considerations have been taken into account when we made the decision to divest Gearbox.
All right. Perfect. Thank you, Lars. And yeah, happy Easter.
Thank you. Welcome back to Värmland, Erik.
The next question is from Simon Jönsson. Please go ahead. Your line is open.
Yes, good morning. Thank you for taking my question. First of all, considering that you keep Lost Boys, will they continue to work with Gearbox, or what does the future look like for them?
Lost Boys is one of the more successful independent standalone work-for-hire business partners to many of the most recognized games developers in North America that has been on a growth trajectory in the past years. Gearbox has been one of their clients, but they have many other well-reputed clients as well. Lost Boys is very much a standalone business going forward. I will not comment specifically on the details about their clients, but I'm confident in the management team's ability to manage and grow that business going forward.
Okay. So they will continue with work-for-hire, it seems like.
They will continue to work with external games companies, yes.
All right. And also, and you touched on this a little bit, but looking at the pipeline, you have now sold the Space Marine 2 potential and the Homeworld 3 potential. And they were two of the bigger titles you had announced or the two biggest you had announced for this year. Will you come back with information about the pipeline for this year in the Q4 report, or how should we view that?
Yes. I don't want to make any new promises this morning, Simon. So obviously, it's in our interest to be transparent to the market as much as we can. We will now soon start looking into upcoming communication about the business. There are many things we would like to talk about, but not on this call. We have, to repeat, even without Homeworld and without Space Marines, a very solid pipeline for next financial years. I'm very confident in that.
All right. Got it. Focus has been a lot on PC console recently, but with the improved balance sheet, how do you view the potential to invest more in tabletop and Asmodee, especially new acquisitions?
Well, Asmodee is one of the absolute most important businesses we have within the group, and I'm very keen to support them. We will come back to the specifics of how we see the investment in that business going forward. I'm just excited and pleased to see their success on the recently released Star Wars trading card game, for example.
Okay. Thank you. That's all from me. Happy Easter.
Likewise.
The next question is from Amar Galijasevic from Carnegie Investment Bank. Please go ahead. Your line is open.
Good morning, guys. Just two questions from me here. First one more to Johan. You say that the purchase price is dependent on normalized working capital levels, and maybe it's a stupid question for me, but could you explain a bit more what that means and why the price is dependent on that?
Yeah, I think that's part of sort of customer purchase price mechanism when you're looking at the purchase price on a cash and debt-free basis that you assume and adjust for a normalized working capital level when establishing the net proceeds in the EV equity bridge.
Okay. So just a bit about the wording. And then a follow-up question I know might be hard to ask, but on Erik's initial question, maybe I misunderstood something, Lars. But when you announced the Saber divestment, you wrote something along the lines. The value of completed games is expected to be notably higher in the next financial year than in LTM Q3. I know you touched upon this, but does the Gearbox divestment make a big difference to that statement? You don't have to give us exact numbers.
No. It's obviously Gearbox had some games under development, but I would say that were to be released. But the only one that we are talking about this morning is Homeworld 3 that were slated for the first quarter, which is a midsized game release. So obviously, the divestment reduces that a little bit, but I would still say and point to that we still expect to have a growth CapEx going forward comparing to the historical numbers of the completed games.
Okay. Very clear. We're looking forward to getting more details on the next quarterly report. That's all from me. Thanks.
Thanks.
The next question is from Rasmus Engberg from Handelsbanken. Please go ahead. Your line is open.
Yes. Hi. Good morning. Now that you have sort of concluded the restructuring, I'm pretty sure there's a plan going forward. Is there anything you can say now, or can you perhaps indicate when you will be ready to talk about how you deploy your cash flows going forward?
Morning, Rasmus. No, I think to start with, we focused this morning on this morning's transaction, and we are very glad and excited to have signed the binding agreement of the divestment of Gearbox. I fully respect that there is a great interest in the specifics of the groups in the coming year and the coming years. We will get back to you and the market at a later date on the specifics. In general, I think I'm super excited about all the companies and the people and IPs and businesses that we have remaining within Embracer. I think sometimes when reading media, it's a simplified thing to just look at Embracer as a PC console business. We are so much more than a PC console business: tabletop, mobile, the licensing business of Lord of the Rings. That creates significant cash flows and stability into the group.
Also within PC console, we have many of the world-leading game developers remaining within the group, including many of the most recognized IPs. I'm fully confident about our future also without Gearbox and Saber being part of the group.
Very good. Thanks.
The next question is from Ali Naqvi from HSBC. Please go ahead. Your line is open.
Hi. Good morning. Thank you for taking the question. Just a follow-up point. You said there's no more structured divestment. So if any more M&A were to happen, it would be because another party has approached you. And how likely do you think that is in the current environment, seeing as you're closer to the M&A side of it than we are? Secondly, the point you made regarding looking to grow CapEx eventually from here, does that suggest that Embracer is in a current stable place now as all the restructuring is ending? And then are you planning on growing staff, or where does this CapEx growth come from? And the final point on M&A, are you going to participate in any more M&A in the sector yourself, or are you drawing the line under that for now?
Well, to start on the M&A front, obviously, we are ending the restructuring program now, end of March. So there are not many days left. And the Gearbox structure process has been part of that restructuring program. Now, I've been getting approached, and we are getting approached, I would say, if not daily, but on a weekly basis, about companies that would like to acquire certain assets within the group. And I've been very clear that they are not for sale because they are a very important part for the group and for the shareholders of the group going forward. So that's why we are taking the more difficult route to actually divest businesses that have a negative cash flow, which are more difficult transactions, but makes the remaining part of Embracer more cash flow-generative with a more clear-focused strategy into the future.
Looking to do more M&A deals, I think it's way too early to start talking about restarting the M&A engines again. Now, we are in the late phases of the consolidation into the future of the group, and that's our absolute highest focus and priority: how we set up ourselves and structure ourselves and utilizing our assets we have within the group and having them working together and how we leverage them better to working together, utilizing different functions. I think that's our focus right now: to increase profitability and cash flow generation and simply to make by simply making better products and games.
Understood. Thank you. Happy Easter.
There are no more questions at this time, so I hand the word back to you, Lars, and you, Johan, for closing remarks.
Thank you, Einar. Thank you, everyone, for tuning in this morning. I wish you all a happy Easter. Thank you.
Thank you.
This concludes today's call. You may disconnect your lines.