Gremlin Group  (GGP) *

* Gremlin Group has now been acquired by Infogrames

Company Background
Gremlin was founded in 1984 as a development company and have since expanded into publishing. In December 1996, Gremlin purchased Scottish developers DMA Design in a deal worth around £4.2m. The Company currently has around 300 employees based at 3 sites. Gremlin's titles to date have been published in the States by Interplay, but in December 1997, the Company signed a new publishing deal for its Actua Sports (and two non-sports) titles with Fox Interactive and it is likely that future non-sports titles will be negotiated on a product by product basis. In the UK, Gremlin distribute direct to large multiples and in Europe, the Company is to source individual territory distribution deals on a product by product basis whilst still retaining Funsoft as its default distributor. The Company plans to establish mediators in the major European territories to seek the best product by product deals. The UK accounts for 56% of current sales with Europe at 25% and the rest of the world at 19% although the Company expects a greater proportion of sales to come from outside the UK in future. French publisher Infogrames have acquired the Company for £24m.

Activities
In-house development: Gremlin have excellent in-house development resources. 80% of the titles released by the Company to date have been created internally. Following the success of Electronic Arts' EA Sports series of sports simulations (the football series of which has sold over 7 million copies at retail), a number of companies have sought to establish similar franchises. Gremlin are trying to do just that with their Actua series although to date they have only published two series so far, Actua Golf and Actua Soccer. Of these, the Actua Soccer series has performed particularly well. Actua Soccer I sold 500,000 units at retail and 1,000,000 in OEM bundles, alone contributing 45% to 1996 turnover. Actua Soccer II sold over 250,000 units and Premier Manager '98 (both PC and Playstation) over 510,000 (compared to only 85,000 units for the PC only Premier Manager 97). Men In Black has achieved over 300,000 unit sales (in Europe). Further incarnations of Actua Soccer and other Actua sports titles, Actua Tennis, Actua Ice Hockey and Actua Golf III are in development.

DMA Design: DMA design offer a great deal of potential. They achieved a major hit with the Lemmings series of games and enjoy a close relationship with Nintendo. DMA have 4 titles in development for Gremlin, and have already released N64 title Body Harvest.  DMA are also tied to Take 2 Interactive for the sequel to Grand Theft Auto.

Gigabyte: US based third party developers of  Men In Black
Software Refinery: Third party developers
Dynamic: Spanish third party developers of Premier Manager 99
Risk: Third party developers of Actua Golf 3
Rebel Act: Third party developers
Digital Illusions: Third party developers
Astros: Third party developers.
Caji: Third party developers.

Key Titles
The Company has 14 titles (representing some 20 SKUs) due for release during FY99 and 6 currently scheduled for FY00. The company has no single title that will dominate its sales although it has a number of established 200,000-500,000 unit franchises in Premier Manager and Actua Soccer. Other titles of note are those from DMA including Wild Metal Country and Body Harvest. Although revenues will be in the form of royalties only, the US versions of the Actua sports titles (being published by Fox Interactive) could prove to be key given the US company's marketing muscle.

News
24/07/97 The Company raised £8m and achieved a listing on the main market.
COMMENT: Gremlin have been looking to join the main market for some time, making their intentions public during 1996. They announced in May, this year, that they were to float in July with a valuation of between £45m and £55m and were to place 25% of their shares. However, the Company failed to raise as much in the placing as they had originally planned to and the flotation, when it finally got away, saw them open with a market capitalisation of £29m. This fell within 2 weeks to £22m as shares tumbled.  One of their biggest problems is that there do not appear to be any large institutional investors amongst the Company's shareholders and small investors who comprise a significant portion of the shares in issue may have taken a shorter term view.

08/09/97 Gremlin signs Men In Black Licence
COMMENT: Gremlin have signed the exclusive UK and European publishing rights to the Playstation and PC version of the hit Sci-fi film "Men In Black". The game will not be created in house and, in fact, is near completion by a small US development house called GigaWatt. The licence only became available because the original publisher, GTE, decided to pull out of the games market. Historically, film licences have not fared well, frequently being mauled in the specialist press, although the recent success of Die Hard Trilogy by Fox Interactive, which was well received and has sold in volume, has proven that film licences can be effective.
Gremlin will be announcing two new publishing deals for third party developed titles shortly.

12/11/97 1997 Year-end Results, Sales Orders Announced
COMMENT: The results (see table above) were in line with expectations and reinforce the image of Gremlin as an impeccably run and fast growing company. Turnover increased by 32% whilst PBT rose 16%. Unusually for a listed games company, Gremlin are proposing to issue a dividend in May 1998 and gave an indication of the level expected to be paid out by suggesting that, if the company had been listed for the whole of the financial year, then a 3.5p/share dividend would have been issued.
The company also announced that the Playstation version of Actua Golf 2 had achieved sales in excess of £1.3m in Europe since launch with a PC and US release expected during the first quarter next year.
The company also took the opportunity to announce pre-release sales orders on three key titles. 70,000 orders had been placed for Judge Dredd, a Playstation title, whilst 145,000 orders had been placed for the PC version of Men In Black (Playstation version due in April '98) and 100,000 and 120,000 orders had been placed for the PC and Playstation versions of Actua Soccer 2 respectively. Re-orders have been placed on Men In Black and Actua Soccer 2 (after only two days of sales). In particular, revenues from Actua Soccer 2 are expected to go on and supersede revenues achieved by the original Actua Soccer and the company will be promoting the game heavily including adverts on Sky television and official endorsement from Alan Shearer.

08/12/97 Gremlin sign long-term publishing deal with Fox Interactive, win rights to publish Tamagotchi PC game in Europe.
With only two titles left of the current North American publishing deal with Interplay, the company needed to sign a new deal soon for its other titles. As Interplay has set up its own Sports range, there would have been a clash of interest if they were to continue to publish Gremlin's increasingly sport-orientated portfolio. Fox Interactive are a relatively new entrant into games publishing but are the only "Hollywood" company to have achieved any success in the market and have only a limited sports brand. Given Fox's marketing muscle and track-record this looks to be a very prudent move by Gremlin and it is likely that Fox will assist greatly in the crucial acquisition of licensing deals and endorsements for the sports titles.
The Company has also signed the European publishing rights to the PC version of Bandai's phenomenally successful Tamagotchi virtual pet. The game, which is now available, is budget priced so will produce reduced wholesale returns per unit.

24/03/98 Gremlin announces strong Interim results

The Company's interim results show a 62% increase in sales on last year, reflecting the strong performance of Actua Soccer 2 (250,000 units - PC and PSX), Men In Black (126,000 units - PC only) and Actua Golf 2 (120,000 units - PC and PSX). It is worth noting that these figures reflect European sales only and that, for the sports titles, US releases have yet to come. The fact that PBT has not increased in line with turnover is the indicative of the growing contribution of PSX sales to overall sales. PSX titles are considerably lower margin than PC titles because of the royalty that is paid to Sony for every game published for its console. It is also worth noting that margins on N64 titles are even more stretched because of the higher royalty/manufacturing charge levied by Nintendo for its games cartridges. This move towards lower margin console publishing coupled with a shift towards a greater contribution from non UK territories where margins are also lower, will result in further sales increases coupled with reduced margins. However, the prospects do look good for the Company. 7 titles are due to be released in Europe and 4 in the US during the second half of the financial year and the directors appear confident that they will exceed the consensus forecast PBT of £3.9m for the year ended 31/07/98.
Funsoft, the European distributors with whom Gremlin have just terminated a distribution agreement, now no longer have any equity interest in the Company. However, this is likely to be more because of the defunct trading relationship with the Company and for Funsoft's own financial reasons (it has been struggling in its core European territories) than a lack of confidence in the Company, as might have been read into such a move.

21/05/98 Distribution agreement signed with Infogrames France
The Company have signed a 3 title (4 sku) deal with Infogrames for the distribution of their games in France. The titles covered are men In Black (PSX), Premier Manager 98 (PSX) and Motohead (PSX, PC). This is the first manifestation of the Company's change in European distribution policy -a move away from Funsoft and towards product by product deals. Whilst the terms of the deal will have been similar to that negotiated with Funsoft, the Company should benefit from Infogrames' better marketing and sales in France (where it has 20% of the market). Significant pre-orders for Men In Black (released 15/05/98) have already been received and the Company is very likely to announce similar distribution agreements prior to their next major European releases, N2O and Buggy (due in July).

13/05/98 Acquisition of Australian Distributor
Gremlin have taken another step in overhauling their distribution strategy to maximise returns from overseas territories with the acquisition, for £0.5m, of Mainstream Interactive. Mainstream acted as the Company's distributor in Australia and New Zealand and were marginally profitable during their FY97. Whilst allowing the Company access to increased margin in these growing territories, the acquisition removes the stock risk for Mainstream (previously the company had to wholesale buy titles from Gremlin at £12-15/title), thus allowing it to focus more on marketing and hold larger stock levels.
The Company also released information about its buy-back of the rights to publish DMA's Body Harvest from Nintendo. Body Harvest was originally funded and due to be published by Nintendo, a position which was complicated by the acquisition of DMA by Gremlin. As a result of the agreement, Gremlin will publish the game in Europe with Midway acting as publisher in the US. Gremlin will therefore be able to realise far greater returns, as publisher, on a title that has received some very favourable pre-release press coverage. Body Harvest is due out in October 1998. 

27/10/98 Gremlin reveal better than expected 1998 results
As indicated in the 1998 figures at the top of the page, Gremlin continues to match the market's growth with 21% rise in PBT to £4.1m on considerably increased revenues of £26.6m (£1997: £15m). Whilst sales and pre-tax profitability matched the higher end of analysts' forecasts, the 14% rise in EPS (which was expected to have fallen due to the exercise of options increasing the issued share capital) was good news, arising principally because of a lower than expected tax charge for the year.
During the year, the Company achieved some very respectable sales figures with a total of 3 million units sold and 8 new titles released. Football games Actua Soccer II and Premier Manager '98 managed 250,000 and 288,000 sales unit sales respectively whilst Men In Black proved the biggest seller with 295,000 unit sales. Partly due to the success of the the football titles, UK sales increased to 50% (from 40%) of total revenue although that figure should fall for FY99 following the signing of new distribution agreements during FY98 in France, Germany, Australia and North America.
The Company have 14 titles lined up for FY99 including the DMA N64 game, Body Harvest which the company believes could sell in excess of 500,000 units.

21/12/98 Gremlin issues profits warning
Following worse than expected sales of a number of key titles, the Company was forced to issue a trading statement. The failure of Actua Soccer III and, in particular, Body Harvest (sales of which had been forecast at 500,000 but will likely be less than 200,000) to sell in volume were thought to have been the principal causes of a significant downgrading of anticipated profitability for FY99. The company appears to be on course to break even during the first half of the year and report a lower -but not insignificant-  year-end profit (around £1.5m PBT).

25/01/99 Company confirms acquisition talks
Gremlin has confirmed that after 20 difficult months as a listed company, it is in talks with potential acquirers but refused to reveal who is courting the Company. It has been hinted in the specialist press that the principal suitor is US-based although this narrows down the list only slightly. With the games market at an all-time high, strong cash positions and high valuations for almost all of the larger players and recognition of the increasing importance of European-sourced content, all of the US publishers could be seen to be in a position to make acquisitions. In fact, of the large US publishers, only Activision has openly stated it is not looking to expand further into Europe through acquisition (preferring to tie-up European content in publishing deals). Likely candidates include EA, GT Interactive, Infogrames, Take 2 Interactive, THQ, Hasbro, Mattel and Acclaim.   

24/03/99 Infogrames announces cash offer for Gremlin, Gremlin announces interim results
A 120p/share cash offer by French (listed) publisher Infogrames has been unanimously accepted by the founders and many of the principal shareholders and the company looks set to de-list. The offer has been accepted by 53.8% of the company and Infogrames legally need to have the offer accepted by 90% of the shareholders before it can force the remaining shareholders to sell at that price. The fact that the potential acquirer is Infogrames is not a surprise as the company has an open acquisition policy and a considerable war chest to spend on suitable deals.
Although the resources being sold to a potential buyer of Gremlin are considerably larger than they were at the time of floatation (and therefore could be seen to make the company more valuable to a trade buyer), the fall in share price that the December profits warning precipitated has widened the gap between City and industry valuation. This took place to such an extent that the founders have simply had enough and the industry has recognised a bargain. The industry ( in the form of Infogrames) will look at the potential offered to it by its sports franchise, its other internal development resources and its development subsidiary, DMA, and assess how it, as a larger publisher/distributor, could augment sales beyond what Gremlin would achieve independently. It will, to a large extent, have ignored the volatility of the company's financial results (as being part and parcel of small games companies' businesses), using it to justify as low a valuation as they can get away with.
The Company also announced its interim results revealing a pre-tax loss of £1.2m (worse than expected even at time of the profits warning) compared to a PBT of £2.5m for the equivalent period in 1998. Turnover increased 39% to £13.2m due to the release of 9 titles, including Premier Manager '99, during the period (compared to 8 during the whole of FY98). This, as was mentioned in earlier news, was principally due to the poor performance of a number of key titles including Actua Soccer III (which on PC and PSX only managed 137,000 units) and Body Harvest (which achieved 90,000 units on N64 in Europe).

06/99 Infogrames reaches 90% holding in Gremlin
Infogrames have now managed to acquire 90% of the issued Gremlin equity thus giving it the right to buy all the outstanding shares.

Conclusion
The Company's dismal performance on the main market since floatation appears to have finally led to the Company founders' decision to entertain acquisition offers for the company. Following its profits warning in December 98, Gremlin's share price collapsed and it was at this point that the discrepancy between the way the City values games companies and the way that the industry values games companies became most apparent. Despite the dip in fundamental performance that the company will experience this year, the company remains tightly run and has a promising line-up for 2000 and beyond. The potential this offers a trade buyer is very considerable and it is no surprise that a number of companies are involved in the bidding process. With typical US and French P/Es in the 30-50 region (compared to an industry average of between 9 and 12 in the UK), the effective cost of acquisition using an equity consideration is low compared to a cash equivalent.  

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