ByteDance in Talks to Buy Stake in Mobile Games Company CMGE: Sources

China's ByteDance is in talks to buy into mobile games publisher CMGE Technology, four people with direct knowledge of the matter told Reuters, as the owner of short video app TikTok moves to strengthen its next pillar of growth.

The deal would come as the gaming industry continues to benefit from COVID-19 pandemic countermeasures which have forced people to stay at home, boosting game downloads.

ByteDance plans to buy part or all of the 27.6 percent CMGE stake held by Fairview Ridge Investment, controlled by CMGE chairman Xiao Jian and vice chairman Sin Hendrick, said two of the people.

ByteDance is looking to offer HKD 4 (roughly Rs. 40) to HKD 5 (roughly Rs. 50) per share to purchase the stake, said another person. The range represents a premium of 30 percent to 62 percent above the stock's Monday close of HKD 3.08 (roughly Rs. 30).

Following the news, CMGE stock reversed losses and rose as much as 21 percent to HKD 3.75 (roughly Rs. 35) in Tuesday afternoon trade, their highest since mid-October.

Xiao and Sin are the biggest shareholders of Hong Kong-listed CMGE, holding 33.9 percent and 32.6 percent respectively through a number of entities, regulatory filings showed.

A 27.6 percent stake is worth $275 million (roughly Rs. 2,000 crores), Reuters calculations showed based on CMGE's market capitalisation of $997 million (roughly Rs. 7,400 crores) on Monday.

Eight-year-old ByteDance has identified gaming as its next strategic growth area and has been scouting for investment opportunities for months to build up its gaming portfolio, three of the people said.

Market leader Tencent proposed a $1.5 billion (roughly Rs. 11,100 crores) acquisition of Leyou Technologies in August. That made CMGE more of a target for ByteDance, said two of the people.

A successful transaction could make ByteDance CMGE's single largest shareholder, said one of the people. The deal is yet to be finalised and is subject to change, the person said.

The people declined to be identified as the information is not public. Neither ByteDance nor CMGE responded to requests for comment. Reuters could not reach Fairview for comment.

ByteDance has already been relatively successful with casual mobile games that mainly make money through advertising. It plans to release its first "hardcore" game in the April-June quarter, said two other people with knowledge of the matter.

Hardcore games can be a steady source of revenue as users tend to keep playing popular titles for years and are willing to make in-app purchase for items that enhance game play, such as weapons.

CMGE boasts the second-largest intellectual property reserves among Chinese games firms after Tencent, and counts The Legend of Sword and Fairy and Xuan-Yuan Sword in its portfolio. It has exclusive licensing agreements with ByteDance for two titles - The King of Fighters: All Stars and One Piece: The Voyage.

ByteDance entered gaming in early 2019 with casual titles. By the end of last year, 13 of its games had became hits on Apple's App Store in China. It has a games division with around 2,000 employees working on hardcore games.

© Thomson Reuters 2020

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