MIDAS SHARE TIPS UPDATE: Our Sumo tip was ahead of the game as backers wrestle with a £920m bid for the prosperous Yorkshire business
When Carl Cavers started video games group Sumo in 2003, a friend lent him somewhere to work free of charge because he and his three co-founders could not afford to pay any rent.
None of them took a salary and early employees accepted peppercorn wages, in the hope that they could work together and build up a meaningful business.
Those hopes proved well-placed. Last week, Cavers recommended a £5.13 a share bid from Chinese tech giant Tencent, valuing Sumo at £919million.
In the bag?: Sumo, which developed Sackboy: A Big Adventure, is set to be bought by Chinese firm Tencent
Sheffield-based Sumo has clearly come a long way in the past 18 years. The group is one of the best-known games developers in the world, counting giants such as Microsoft, Sony and Apple as customers.
Now employing 1,200 staff, Sumo designs, builds and tests games, as well as providing customer support post-launch. Top games include Sackboy: A Big Adventure and Team Sonic Racing, and Sumo has started to publish its own titles too, including Spyder and Snake Pass.
Publishing is higher risk but higher reward and Tencent clearly believes that Cavers and his team have what it takes. The Chinese group bought 15million shares in Sumo back in November 2019 and has been watching developments ever since.
Armed with its holding, equivalent to 8.75 per cent of the company, Tencent pounced on Tuesday last week. The offer was 43 per cent higher than Sumo’s share price the day before the bid was made and several big investors have already agreed to the offer, so the Chinese now have more than 33 per cent of Sumo’s shares in the bag.
Nonetheless, there is debate about the deal. Sumo will be the second UK video group to fall prey to a foreign predator, after another Midas tip, Codemasters, was snapped up by US rival Electronic Arts earlier this year. And Shenzen-based Tencent, which is listed in Hong Kong, could be vulnerable to the whims of Xi Jinping, China’s autocratic president.
This has prompted calls for Tencent’s bid to come under further scrutiny from the UK Government and regulators. As of yet, there is no hint of concern from the authorities. But individual Sumo shareholders may legitimately wonder what they should do, as the Tencent bid goes through due process. Midas recommended Sumo in September 2018, when the price was £1.64.
We looked at the business again in October last year, by which time the stock had risen to £2.60. Despite that increase, it seemed as if there was still plenty more upside, as Cavers had just completed a big acquisition in the US and was excited about publishing more of his own games.
Today, the shares are £4.95. They are 18p lower than Tencent’s offer price but initial investors have still tripled their money while those who bought last autumn have made a 90 per cent return in just nine months.
Some may be tempted to sell out now. Some may prefer to wait, either hoping that Tencent clinches its deal or that another bidder comes in with an even higher offer. The latter option seems unlikely. Tencent has made a generous offer and it has unanimous support from the board, while Sumo’s biggest shareholder Perwyn, a large family investment firm, has also backed the transaction.
Whether outside forces prevent Tencent from completing its deal is a different question.
Sumo’s board, it would seem, think fears of this nature are misplaced.
Tencent has deep pockets, it is an international business and should help Cavers deliver on his ambition to publish more games and make Sumo even more successful than it already is.
Cavers has also spent years cultivating a collegiate culture at Sumo. While he stands to make millions from the Tencent takeover, close friends say that he would not agree to a takeover deal unless he thought employees would benefit too.
Midas verdict: Sumo is a proud and prosperous Yorkshire business and shareholders have benefited handsomely from its growth. Cautious investors should sell out now just in case Tencent’s ambitions are thwarted. The rest should hold out for Tencent’s £5.13-a-share prize and hope that the Chinese company does its best by Sumo.
Traded on: AIM Ticker: SUMO Contact: sumogroup.plc or 0114 242 6766