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The Euro Vision: Why Warners And SCi?

The Euro Vision: Why Warners And SCi?

December 20, 2006 | By Jon Jordan

December 20, 2006 | By Jon Jordan
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It was the week before Christmas, and throughout the game development community, not a creature was stirring, not even a mouse. Especially the mice. Everyone had gone home to play Gears of War. On the other hand, when it comes to game journalists, the mouse and keyboard proves to be as active as ever.

With most magazines and some websites shutting down for the duration, everyone wants two weeks work neatly delivered so the salaried staff can settle down to their goose fat roasted potatoes and glasses of tawny port. Not so at Gamasutra however, where the Tiny Tims will be found with their noses close to the grindstone next week, and even veteran game journalists will have to take a break their Boxing Day jollities to fulfill the publics latent desire for gaming news.

Warners Makes Its Move

But before the anticipation of that event, we have this weeks European activities to cover. The biggest news was something most people thought had been completed months ago. I refer to the deal between UK publisher SCi-Eidos and Warner Bros. Entertainment Inc.

Demonstrating how long negotiations can drag on when you have entertainment lawyers on the case, the vanilla view of the deal sees Warners becoming a large minority shareholder in the publisher, SCi gaining US distribution, and Warners granting SCi access to some of its less important licenses.

Considering these components in more detail, the first part sees Warner Bros. shelling out 44.4 million ($86.7 million) to acquire around 9 million new shares that SCi will issue at a price of 5.02 ($9.85) per share, which is roughly the current shareprice. Warners will end up owning 10.3 percent of SCis expanded sharebase.

The second part of the deal sees Warners providing warehousing, logistics, merchandising and media-buying services for SCi products in the US.

The final component gives SCi access to various licenses. Most of these can be described as marginal at best. Frankly its hard to see anyone really wanting to make games based around properties such as the comic book version of Batman, the Looney Tunes, Loonatics Unleashed, Legion of Super Heroes, and some Hanna-Barbera properties such as Tom and Jerry, the Flintstones, Yogi Bear, and Huckleberry Hound. Presumably thats why they were still available - no one else was interested.

Indeed the only license that could be considered significant is glossy teen drama The OC. But even in this case, it will need some very clever design and marketing to make a successful game out of such a tangled web of young lust and flashing pearl white teeth, as Buena Vista Games discovered when it had a crack at the similarly fluffy Desperate Housewives. Perhaps the best opportunity would have been a mobile version of The OC, but Gameloft has already signed that up.

Any Old Iron?

So the more you consider the deal, the more strange it becomes. The most important piece should be the most mundane as Warners should be able to provide more efficient and cheaper distribution for SCi. But having said that, Eidos recently provided US distribution for Warners' Justice League Heroes games in the US, so it seems a bit peculiar for the tables to be reversed so suddenly.

True, the licensing element could be significant but only if SCi is prepared to heavily invest in kids games. It has had some exposure in this area, as it successfully distributed the first Lego Star Wars game and has recently released a Tom and Jerry title, and has Bionicle Heroes and DS game Pony Friends pencilled in for 2007. But its hard to see it competing longterm against the likes of THQs Pixar catalogue with Warners forty year old leftovers.

To that extent the $86.7 million could be vital of course, but SCi already has 37 million ($73 million) sitting in its bank account and a further credit line of 30 million ($59 million). Its also getting heavily into thirdparty funding for games with private investment companies so its not like SCi desperately needs the money.

Because We Want To

Perhaps a more fundamental question is why Warners wants to partner up with SCi in the first place? Having set up Warner Bros. Interactive Entertainment under the helm of Jason Hall in 2004 (who kicked up a fuss by floating the idea of using low game review scores as contractual penalties for licensees of Warner properties), things have gone rather quiet.

The real problem for these big media companies is after twenty years they still dont get games. With annual revenues of around $12 billion, Warner Bros. dwarves EA but without an aggressive and expensive swoop for a publisher like Activision or THQ, there arent many less risky options for the conglomerates to get enough skin into the game business to make it worthwhile. Hence they seem content to continue their softly, softly approach of mixing licensing deals and tiny equity exercises such as this one. To that extent, Viacom chairman Sumner Redstones decision to take control of Midway using his personal fortune seems like a masterstroke - well, it would be if Midway ever turns a profit.

So could one potential endgame of this deal see Warners taking complete control of SCi in future? Perhaps. Certainly the current marketcap of around 400 million ($785 million) would be peanuts for Warners to raise, but it wouldnt really be getting much for its money, considering the Lara Croft brand is already licensed out to Viacom-owned Paramount when it comes to films.

SCis shareholders, which include financial institutions such as Deutsche Bank, UBS, Credit Agricole Cheuvreux International and Artemis Investment Management, dont seem to be expecting any further merger activity between the two companies either. While there seems little doubt that the Warners deal will gain shareholder approval as required, SCis shareprice has remained solidly within its current range around the 5 mark, since the deal was announced.

Frankly, the more I consider it, the more it seems like one of those deals that gets made for the sake of it.

[Jon Jordan is a freelance games journalist and photographer, based in Manchester, UK. He loves entertainment lawyers, really, but couldnt eat a whole one.]


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