What Will Be The Impact of Small Giant Games Acquisition On Zynga’s Earnings?

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Zynga (NASDAQ:ZNGA) has recently entered into an agreement to acquire Small Giant Games, best known for its Empires & Puzzles franchise in a deal valued at $560 million for an 80% stake in the company. The acquisition can add roughly 12% to Zynga’s earnings, according to our estimates. We have created an interactive dashboard ~ How Much Value Can Small Giant Games Acquisition Add To Zynga’s Earnings ~ which shows the incremental earnings for Zynga. You can adjust various drivers drivers to see the impact on the earnings. Below we discuss our forecasts in detail.

Zynga will acquire Helsinki-based Small Giant Games for $330 million cash, and $230 million in Zynga’s stock for an 80% stake in the company. Zynga will purchase the other 20% stake over the next 3 years. Zynga expects the acquisition to add to its forever franchises portfolio. Small Giant Games’ monthly active users (MAUs) are estimated to be north of 3 million, and average revenue per active user of $43 will translate into revenues of over $140 million. However, the company estimates its revenue run rate to be $130 million. The Empires & Puzzles has also been in the top 10 grossers list with 26 million downloads. Zynga expects to close the transaction in January 2019, and have guided for a 7% growth in bookings and 9% EBITDA growth in 2019. Zynga’s stock price has moved by over 13% since the merger announcement.

We assume the adjusted net income margin for Small Giant Games to be the same as Zynga at 13% to arrive at $19 million earnings. Zynga’s stake is 80% in the company, which translates into $0.02 EPS assuming 890 million shares outstanding. We currently have a $0.14 EPS forecast for Zynga, and $0.02 incremental EPS represents roughly 12% of Zynga’s 2019 earnings estimate.

 

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