Video games developer Sumo (SUMO:AIM) joins AIM on Thursday with a £145m debut market value. The company has convinced institutional investors to invest £38.45m of fresh growth funding.
That evident firm appetite for the IPO from professional fund managers likely reflects Sumo’s compelling growth story and prospects. It may also be supported by the stellar returns delivered by industry peers in recent years, such as Keywords Studios (KWS:AIM) and Frontier Developments (FDEV:AIM), two of the junior AIM exchange’s standout recent success stories.
GRAPPLING FOR GROWTH
Sumo will issue the new shares at 100p. The main aim of the new funding will be to raise Sumo’s profile and inject additional working capital into the business, although it will also use some of the cash to deleverage the balance sheet.
The company says it wants to ‘continue to grow organically as one of the leading co-developers of AAA-rated gaming titles in the world, primarily using its contracted development fee model to minimise risk, and taking advantage of the forecast growth in the global video game market.’
That said, selling shareholders have also taken a chunky £39.7m off the table, offloading equity at the same price.
WRESTLING WITH THE BIG BOYS
Sumo’s core business is Sumo Digital, a leading UK developer of AAA-rated video games. Established in 2003, Sumo operates out of studios in Sheffield and Nottingham, as well as Pune in India and Vancouver in Canada.
Over the years, it has fostered strong ties with major developers and publishers including Microsoft, Sony, Sega, CCP Games and IO Interactive.
Since 2003, Sumo Digital has provided co-development and turnkey development services on more than 40 titles, contributing to hit franchises such as OutRun 2, Hitman, LittleBigPlanet, and Sega & Sonic All-Stars.
In June 2017, Sumo acquired complementary outfit Atomhawk, a visual design company servicing the games, film and visual effects industries involved in creating movies like Guardians of the Galaxy and Avengers II and games such as Mortal Kombat and Killzone.
Sumo’s AIM listing will help facilitate further takeovers. The company says it will weigh up earnings enhancing acquisitions of premium video game service providers as well as complementary video game developers.
This year, Sumo Digital released its first own intellectual property title, Snake Pass, a game which has proved a big hit. Over 170,000 units have been sold since March 2017, generating a return on investment in excess of 83%.
Commenting in today’s intention to float announcement, CEO Carl Cavers, who founded Sumo Digital in 2003 alongside Paul Porter and Darren Mills, pictured front to back below, says: ‘This is a significant step forward in Sumo's journey to become a global leader in premium development and creative services to the video game and wider entertainment industries.’
Significantly, the video games industry is in fact the largest entertainment market in the world, valued in excess of $113bn by some estimates, and growing at 8.4% per annum.
Some investors aren’t fans of the sector, which has a reputation for sales and earnings lumpiness, yet as Sumo points out: ‘The growth of digital distribution and backwards compatibility of new hardware releases has resulted in a smoothing of console cycles seen historically and an increase in the demand for high quality creative output from publishers to satisfy consumer requirements’, which naturally, Cavers and his colleagues believe Sumo is well positioned to benefit from.
