Sumo Group, the award-winning provider of creative and development services to the video games and entertainment industries, is pleased to announce that it has signed a contract (the "Contract") to acquire Lake Street Labs Buyer Corp ("Lake Street Labs"), the owner of Pipeworks (the "Acquisition") for an enterprise value of up to $99.5m (based on the Reference Share Price), with initial consideration of $59.5m. This initial consideration is being satisfied as to $35m from the Group's existing cash resources and $24.5m through the issue of new equity in Sumo Group.
Founded in 1999, Pipeworks is an innovative, well-established, and respected US video games developer based in Eugene, Oregon. It provides full development, co-development, and live operations to premier video game publishers and other partners. Since foundation, Pipeworks has shipped close to 100 games and advanced technology solutions to nearly 50 clients and partners.
Pipeworks is also a leader in the application of emerging technology and game science to adjacent complementary markets, including the US public sector, distance learning, remote healthcare, and AI-driven simulation.
?Pipeworks gives Sumo Group a significant presence on the West Coast of the US enabling better access and support to existing and potential new clients based in North America.
?Revenue on a standalone basis of $14.8m, generating underlying adjusted EBITDA of $2.4m in the year ended 31 December 2019 and equivalent figures of $19.4m and $4.2m respectively for the 12 months ended 30 June 2020. 95.1 per cent of forecast Games revenue is contracted for the remainder of the year to 31 December 2020. Games revenue is expected to represent approximately 80 per cent of total revenue.
?Growing talent is vital to the success and growth of Sumo Group. Pipeworks' 134-strong team brings an abundance of valuable experience and takes the Group's headcount to nearly 1,000.
?The Acquisition brings additional Original-IP and Own-IP to the Group, including the video game Prominence Poker.
?Strong cultural alignment - the business and its management, including CEO Lindsay Gupton, are well known to Sumo Group, with Pipeworks and Sumo Digital sharing ownership history, as part of Foundation 9 Entertainment.
?Initial consideration satisfied by $35m in cash and by the issue of 9,893,940 new ordinary shares (representing 6.2 per cent of the current issued share capital). Management and employee shareholders will be subject to a 12-month hard lock-up from issue and a subsequent 12-month orderly market arrangement, both on standard UK market terms. Half of the shares issued to the Institutions as part of the initial consideration will be released from a hard lock-up following announcement of Sumo Group's results for the year ending 31 December 2020 and the balance will be released six months thereafter.
?Earnout consideration of up to $40m will be payable based on the performance of Pipeworks in the years ending 31 December 2020 and 31 December 2021, and will be settled partly in cash (between 30 per cent and 70 per cent at the discretion of the Company), with the balance being settled in Sumo Group ordinary shares.
?The Acquisition is expected to be significantly earnings enhancing in the year ending 31 December 2021, being the first full year of ownership.
?Extension of the existing RCF banking facility to £30m from £13m to support the enlarged Group's financial liquidity position. Following completion of the Acquisition, Sumo Group expects to have net debt close to zero.
?The Acquisition is expected to complete by the end of October 2020.
Acquisition aligned with Sumo Group's growth strategy:
Client expansion - Pipeworks has built a very strong US-based client list, including Electronic Arts (Madden NFL), Wizards of the Coast, Google, Genvid, and Age of Learning, which both adds and is complementary to Sumo Group's existing relationships;
Geographical expansion - Pipeworks' comparatively affordable West Coast location will bring improved access to the US market;
Expansion of talent - The Acquisition will increase Sumo Group's headcount by 16 per cent to nearly 1,000, and provide a valuable US hub from which to expand further;
New Original-IP opportunity - Pipeworks will continue creating innovative IP, leveraging its vanguard technology, and design ingenuity; and
Entry into new markets - Pipeworks has a proven ability to diversify into new adjacent markets, including non-gaming applications using game science and unique technology combined with its strong creative innovation.
Carl Cavers, Chief Executive Officer of Sumo Group, said:
"We are delighted to announce the acquisition of Pipeworks, the largest acquisition Sumo Group has made since IPO. The acquisition gives us an instant, established and significant presence in the important North American market, with improved access to both new and existing clients and markets. Having known Lindsay for a long time and been a keen follower of Pipeworks, I am naturally delighted to welcome Lindsay and his team to Sumo Group and look forward to working together and sharing an exciting future. This is a major step forward for our business.
"Sumo Group is thriving. Our underlying market is very strong, and we are seeing good opportunities for new games, including Original-IP developed by our talented studios. I would like to thank our team, once again, for their great work, which continues to drive the Group's success."
Lindsay Gupton, Chief Executive Officer of Pipeworks, added:
"We are absolutely thrilled to be joining Sumo Group. Our ambition is to be the best and most innovative game developer in North America and this will be a 'level-up' for all of us at Pipeworks. I've known Carl and the team at Sumo for a long time and have the greatest respect for them as a company, as game developers, and most importantly, as people. The cultural fit between Pipeworks and Sumo is remarkable, and we all love to make great games with great partners. I can't wait for this next big chapter in the long history of Pipeworks."
SUMO GROUP PLC
("Sumo Group", the "Group" or the "Company")
CONDITIONAL ACQUISITION OF PIPEWORKS INC
Sumo Group plc
Via Belvedere Communications
Carl Cavers, Chief Executive Officer
David Wilton, Chief Financial Officer
Zeus Capital Limited (Nominated Adviser & Joint Broker)
Nick Cowles / Richard Darlington / Andrew Jones
Tel: +44 (0) 161 831 1512
Ben Robertson / John Goold
Tel: +44 (0) 203 829 5000
Investec (Joint Broker)
David Flin / Bruce Garrow
Tel: +44 (0) 207 597 5970
Belvedere Communications Limited
Tel: +44 (0) 7715 769 078
Tel: +44 (0) 7967 816 525
Tel: +44 (0) 7407 023 147
Allen & Overy LLP is acting as legal adviser to Sumo on the transaction.
About Sumo Group - www.sumogroupplc.com
Sumo Group's businesses provide acclaimed development and design services to the video games and entertainment industries from studios in the UK, India, and Canada.
Sumo Digital, as the Group's primary business, is one of the UK's largest independent developers of AAA-rated video games, having studios in Sheffield, Newcastle, Nottingham, Leamington Spa, Warrington and Pune, India. The business has acquired three studios since IPO, which operate under their own names, BAFTA award-winning The Chinese Room in Brighton, Red Kite Games in Leeds, and Lab42 in Leamington Spa. Sumo Digital provides turnkey and co-development solutions to a global blue-chip client base.
Atomhawk is a multi-award-winning visual design company, with studios in Newcastle and in Vancouver (Canada), servicing the video games, film, and visual effects industries.
Overview of Pipeworks
For 20 years, Pipeworks has been creating best-selling games, original entertainment, and cutting-edge solutions to real-world challenges. Headquartered in Eugene, Oregon, on the West Coast of the US, Pipeworks' team was 134 strong at 30 September 2020, including 123 developers, and supported by an additional 57 external contractors.
Pipeworks' primary focus is the video games market, where it supplies premier publishers and partners with full or co-development services on large franchises and Original-IP. Original-IP comprises game ideas conceived by Pipeworks but not necessarily still owned by the company and ideas which Pipeworks is in the process of selling. Pipeworks has developed and/or operated close to 100 games and interactive technology solutions to nearly 50 clients and partners on multiple platforms. The Client-IP games include Madden NFL20 and NFL21 co developed with EA Sports (Madden NFL). With the exception of 505 Games, which is an Italian video game publisher subsidiary of Digital Bros. SpA ("Digital Bros"), the company's clients are US-based and include Wizards of the Coast, Google, Genvid, and Age of Learning. In the year ended 31 December 2019, the top three clients accounted for 59.1 per cent of total revenue.
Pipeworks has recently secured the video game rights to Prominence Poker, which is a free to play game launched on console and PC. This game was originally created by Pipeworks and published by 505 Games. The management of Pipeworks believe there is a significant opportunity to invest in the further development of this game. Pipeworks continues to dedicate resources to the development of new, ground-breaking Original-IP, drawing from its state-of-the-art technology and gameplay ingenuity.
Pipeworks' development contracts are very similar to those typically in place at Sumo Digital, often involving a master service agreement which sets a framework under which individual statements of work are agreed for specific projects or stages of projects. The contracts or statements of work also follow the regular milestone delivery pattern familiar at Sumo, with staged payments against milestones.
As an established Games-as-a-Service pioneer on all platforms, Pipeworks has leveraged its proven set of core technologies to help development for clients in the areas of AI, Simulation, Machine Learning, Extended Reality, Cloud Streaming and more, delivering transformational solutions for clients in other verticals, including education, healthcare, retail, location-based entertainment and the US public sector. This advanced technology and creative expertise is supplied to MetaTeq, Inc ("MetaTeq"), for the public sector focusing on serious gaming. MetaTeq, which is currently owned by Pipeworks, will be spun out prior to the completion of the Acquisition.
The business has been known to Sumo Group for many years. Like Sumo Digital Limited ("Sumo Digital"), it was once owned by Foundation 9 Entertainment, and the CEO of Pipeworks, Lindsay Gupton, is very well known to Carl Cavers and Paul Porter, the CEO and COO respectively of Sumo Group. More recently Pipeworks was owned by Digital Bros, the Italian software publisher, and it has, since March 2018, been principally backed by Northern Pacific Group, a private equity investment firm headquartered in Wayzata, Minnesota.
Pipeworks has good revenue visibility. Forecast revenue is classified in four categories: Contracted, in contract (contracts being evaluated), likely prospect and placeholder. For the year ending 31 December 2020, contracted Games revenue represents 95.1 per cent of forecast revenue. Games revenue is expected to comprise approximately 80 per cent of the acquired group revenue. The basis of calculating these percentages is very similar to that used in calculating Sumo Group's forward revenue visibility.
Rationale for the Acquisition
The Acquisition will give Sumo Group access to new clients, markets and territories. Pipeworks has long-established relationships and a very strong long-term client list, which is complementary to Sumo Group's existing client base. The location in Eugene is very attractive, as an affordable and talent-rich West Coast location, giving Sumo Group much better access to the US market. Pipeworks' projects include third party co-development work on well-established projects which require a North American base.
Pipeworks is a creator of ground-breaking Original-IP, utilising its proprietary state-of-the-art technology and gameplay ingenuity.
Pipeworks has built a very strong US-based client list, including Electronic Arts (Madden NFL), Wizards of the Coast, Google, Genvid, and Age of Learning.
Pipeworks has proven ability to access adjacent markets by applying its video game science, to deliver transformational solutions.
Pipeworks' proprietary live-game backend technology COSOMO(TM) and development/operations expertise have powered many games and advanced simulations since 2011.
Whilst the Acquisition is not driven by cost synergies, there may be opportunities for synergistic benefits, for example through delivery of work sourced in the US with support from the Sumo Digital studio in Pune.
Pipeworks is a strong business with proven development and co-development expertise with a very similar strategic direction to Sumo Group. It has similar profit margins to Sumo Group and is remarkably culturally aligned due in part to its common heritage. The key leaders are committed to staying with the business.
Terms of the Acquisition
Sumo Group has agreed to acquire 100 per cent of the issued share capital of Lake Street Labs, the holding company of Pipeworks, for an agreed enterprise value of up to $99.5m, with customary adjustments and the earn out provisions summarised below. The share capital of Lake Street Labs is indirectly owned approximately 76.3 per cent by institutional investors ("Institutions"), led by Northern Pacific Group, and approximately 23.7 per cent by management and employees of Pipeworks or MetaTeq ("Management and Employees").
Completion of the Acquisition is subject to certain pre completion conditions, including the separation of MetaTeq, and the allotment and admission to trading on AIM ("Admission") of the Sumo Group consideration shares. Admission is expected to take by the end of October 2020.
The initial consideration (the "Initial Consideration") is $59.5m subject to typical adjustments for cash, debt and normalised working capital and will be payable in the form of $35m in cash in US Dollars at completion and $24.5m in ordinary shares in Sumo Group.
The share element of the Initial Consideration is to be satisfied by the issue of new ordinary shares in Sumo Group at a price calculated as the average of the closing price of the shares for each of the 30 consecutive full trading days (converted each day into US Dollars at the prevailing spot exchange rate), ending on the penultimate trading day preceding the announcement of the Acquisition (the "Reference Share Price").
The new shares will be allotted in accordance with the existing authority provided to the Company's Directors at this year's annual general meeting.
The additional earnout consideration (the "Earnout Consideration") is split into two tranches, with the first tranche of $8m (based on the Reference Share Price) relating to EBITDA achieved in the year ended 31 December 2020. The second tranche of $32m (based on the Reference Share Price) relates to EBITDA achieved in the year ended 31 December 2021, with additional conditions relating to the visibility of contracted revenue in the subsequent year ended 31 December 2022.
The Earnout Consideration of up to $40m at the Reference Share Price is divided into two elements:
·A fixed element, which is 50 per cent of the achieved earnout amount to be satisfied by either the issue of Sumo Group ordinary shares at the Reference Share Price or cash; and
·A variable element, which is 50 per cent of the achieved earnout amount to be satisfied by either the issue of Sumo Group ordinary shares at the prevailing share price at the time of the earnout being settled or cash.
The total earnout will be settled in one instalment following the signing of the audited accounts of Pipeworks for the year ending 31 December 2021 and will be settled partly in cash (between 30 per cent and 70 per cent at the discretion of the Company), with the balance being settled in shares.
In the event of a change of control of Sumo Group, the share component of the Earnout Consideration will be accelerated in order to allow the shareholders of Lake Street Labs to participate in any offer or scheme; however, payment of any Earnout Consideration in cash will not be accelerated in that scenario, meaning the cash earnout will only be paid after the end of the earnout period and only if the applicable performance conditions have been met.
The Contract contains customary representations, warranties, disclosure, accounting controls for a transaction of this kind under Delaware law and customary change of control provisions. In addition, the Contract contains customary interim covenants for the period between signing and completion.
Shares issued as part of the Initial Consideration to the Management and Employees will be subject to a 12-month hard lock-up from issue and a subsequent 12-month orderly market arrangement, both on standard UK market terms. Half of the shares issued to the Institutions as part of the Initial Consideration will be released from a hard lock-up following announcement of Sumo Group's results for the year ending 31 December 2020 and the balance will be released six months thereafter. Shares issued as part of the Earnout Consideration, both to Management and Employees, and Institutions, will be subject to a six-month hard lock-up from issue and a subsequent 12-month orderly market arrangement, both on standard UK market terms.
Financing of the Acquisition
As at 29 September 2020, Sumo Group had cash balances of £30.3m. To support the enlarged Sumo Group's liquidity position, Sumo Group has extended its existing facility agreement with its bankers, Clydesdale Bank plc to a £30m facility. Following completion of the Acquisition, Sumo Group expects to have net debt close to zero.
As part of the Initial Consideration, approximately $23m of cash will be used to settle debt like items in Lake Street Labs or Pipeworks.
Financial information on Pipeworks
Pipeworks' financial year end, like Sumo Group's, is 31 December. For the year ended 31 December 2019, the accounts of Pipeworks, adjusted for the removal of MetaTeq, disclosed revenue of $14.8m, a gross profit of £4.8m and adjusted EBITDA of $2.4m. These figures have been derived from the audited accounts of Pipeworks.
For the last 12 months ended 30 June 2020 ("LTM to June 2020") the equivalent figures were revenue of $19.4m, gross profit of $7.4m and adjusted EBITDA of $4.2m, respectively. Adjustments to EBITDA include the previous owners' management fees, exceptional costs and any adjustments relating to securing the video game rights to Prominence Poker.
For the LTM to June 2020 77.6 per cent of revenue was generated from video games. US public sector revenue accounted for 15.5 per cent of revenue and the balance of 6.9 per cent was generated from other commercial and enterprise customers, leveraging Pipeworks' game-development technology and techniques. This latter category is expected to reduce in scale markedly going forwards.
Financial impact of the Acquisition
Assuming the Acquisition is completed by the end of October 2020, Sumo Group expects Pipeworks to contribute approximately $0.8m to Sumo Group's EBITDA in the year ending 31 December 2020.
The Acquisition is expected to be significantly earnings enhancing in the year ending 31 December 2021, being the first full year of ownership.
Issue of Equity and Total Voting Rights
The Company confirms that, pursuant to the Acquisition, 9,893,940 new ordinary shares of 1 pence each in the Company ("New Ordinary Shares"), (representing 6.2 per cent of the current issued share capital) which will rank pari passu with the Company's existing ordinary shares and these will be issued on completion and admitted to trading on AIM.
The New Ordinary Shares are to be issued at 190 pence per share.
Following the issue of the 9,893,940 New Ordinary Shares and following Admission, the Company will have 169,262,347 ordinary shares of 1 pence each ("Ordinary Shares") in issue, with one voting right each. The Company does not hold any shares in treasury. The number of Ordinary Shares with voting rights following expected Admission will therefore be 169,262,347.
Accordingly, following Admission, this figure may be used by shareholders as a denominator for the calculation by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company under the FCA's Disclosure and Transparency Rules.