This analysis was first published in SvD Näringsliv, in Swedish, on April 22nd, 2024. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
As the Embracer group is dismantled on the stock market, it marks the definitive end of an era of low interest rates and high expectations. That the share surged on the news shows it should have happened sooner.
Lars Wingefors had hoped to get some rest over Easter. He said as much to SvD in March this year, after announcing that subsidiary Gearbox Entertainment would be sold.
Rest, it seems, was not forthcoming. On Monday, Embracer Group announced that the company will be split into three separate parts, each to be listed independently. Embracer in its current form will cease to exist once the transformation is complete.
To understand today’s news, one can look at the underlying promise that Embracer has carried since its inception. It can be simplified to the idea that “we are better together.” By acquiring a long list of gaming companies — covering everything from board games to mobile games — the combined group would be greater than the sum of its parts.
Or perhaps not better. But at least more valuable.
Because unlike conventional consolidation strategies, there were very limited synergies between the different segments within Embracer. Each ran its own race, and Embracer became a thin superstructure designed to hold everything together in the eyes of the market and shareholders. And more than anything else, the company was an acquisition machine that kept adding new businesses to the portfolio.
The strategy rested on two components: low interest rates and multiple arbitrage. When money was cheap, you could borrow enormous amounts of capital to buy new gaming companies. Those acquisitions were then added to Embracer’s consolidated finances — immediately rewarded with the premium valuation of a highly rated stock.
Both of those components have now disappeared. Interest rates have risen, making Embracer’s debt difficult to manage. They have had to sell several companies to service their borrowings. And the era in which they were rewarded with high multiples on the stock market is over. Over three years, the share price has fallen by around 77 percent.
Wingefors summed up the former era when responding to analyst questions: “We were living through the boom years of 2019, 2020, 2021. It was a different world. That world is now over.”
The market appears to have reached that conclusion before Embracer did. The share surged when the news broke, suggesting that confidence in the strategy — in Wingefors’s new world — had been severely limited.
Embracer’s official explanation is that the three separate entities will offer the stock market clarity. The board games business Asmodee and the working-title divisions “Coffee Stain & Friends” (mobile and PC games) and IP-based “Middle-earth Enterprises & Friends” have different profiles — financially and operationally. That is, of course, true. But the same was true when the company first tried to justify why all the businesses belonged together inside Embracer. Gaming is a broad category to consolidate. It is a bit like working in the category of “food” — yes, people eat it. But there is a difference between a street food stall and a slaughterhouse. And there is a difference between board games and mobile games too.
This confusion showed up not least in the criticism the company received for its complex reporting. Presenting adjusted EBITDA figures works best when the market fully understands what has been adjusted for. That has not always been clear at Embracer.
What has been clear is the group’s high level of debt. The sales of Sabre and Gearbox were intended to pay down a portion of it. As part of the restructuring, the board games division Asmodee will receive just over 10 billion kronor in new loans and financing in order to refinance existing debt.
Embracer captured the spirit of its time perfectly. But it was more a financial innovation than anything discernible in the actual businesses. Now that the zero-interest era has passed, the more than 125,000 individual shareholders and around 300 institutional investors have been left with a clean-up job — to bring clarity and order back to the underlying operations.
The solution is to dismantle the very structure that was sold to the market for so many years. Because even though Embracer packaged itself as a gaming company, it was really something quite different: a financial arbitrage play built on cheap debt. And that era — as Wingefors correctly notes — is now over.
