Chinese multinational technology firm Tencent (OTCMKTS:TCEHY) generated headlines when it effectively increased its stake in popular video game developer Ubisoft (OTCMKTS:UBSFY), sending TCEHY stock slightly higher during the midweek session. However, UBSFY plunged about 21% as the deal didn’t go far enough, disappointing onlookers.
Specifically, Tencent invested nearly $297 million in Guillemot Brothers Limited. This deal amounts to a 49.9% stake in the holding company, according to Reuters. This firm owns the bulk of the Ubisoft-founding Guillemot family’s 15% stake in the gaming developer.
Further, the holding company has the largest stake in UBSFY. However, under the aforementioned deal, Tencent will only have 5% of the voting rights for Guillemot Brothers. According to a CNBC report, the “move effectively closes the door on a full takeover of Ubisoft by any party.” Unfortunately, investors hoped that Tencent would take control of Ubisoft, thus sending UBSFY into the ground.
“What this transaction does appear to signal is that any full sale of Ubisoft to a strategic or financial buyer is very unlikely. In our view this should be seen as a net negative for shares (though not for the company itself),” Cowen analysts remarked in a research note Tuesday.
Tepid Response to TCEHY Stock
Currently, Tencent owns a 4.5% direct stake in Ubisoft. However, under the terms of the investment deal, it can raise the stake to 9.99% of the capital or voting rights. However, per CNBC, Tencent will not be able to sell its shares for five years. Further, it will not be able to increase its stake in Ubisoft beyond 9.99% for a period of eight years.
The terms’ disclosure produced a ho-hum response for TCEHY stock. On a year-to-date basis, the security has dropped around 32% of market value.
According to Reuters, the move caps a difficult four-year period for Ubisoft. Operationally, the company — which delivered crowd favorites such as Assassin’s Creed and Rainbow Six — failed to deliver new games in a timely fashion. Additionally, the company faced allegations related to harassment of a prurient nature.
However, management’s comments indicate an attempt to put the challenging past behind. “Tencent is a key shareholder partner for many of the industry’s leaders, who have created some of the most outstanding video games,” said Ubisoft CEO Yves Guillemot. “This transaction reinforces our ability to create strong value over the coming years.”
According to Matthew Kanterman, director of research at Ball Metaverse Research Partners, Tencent is hoping that Ubisoft “can improve its execution and unlock value in its catalogue of intellectual property.”
So far, the initiative is not off to the most auspicious of beginnings.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.