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Will artificial intelligence be able to quickly and cheaply develop video games in the future? EQT isn’t convinced. The Swedish private equity group has struck a deal to buy Dublin-based Keywords Studios, valuing the Aim-listed company at £2bn. Shares in the video game services provider have been under pressure from the threat of AI. The 67 per cent premium on offer from EQT suggests it thinks AI’s potential is overblown.
In fact, EQT has a good price. Even the highest price discussed of £25.50 per share in May was well below Keywords’ 2021 peak. The final offer came in lower, at £24.50. That reflected a downgrade in Keywords’ prospects: it said organic growth in the first half of the year had been negative. It also reflected that one of the UK market’s last remaining gaming stocks had run out of strategic road on the AIM market.
Keywords’ slowdown has more to do with game makers pushing development budgets into the future than with AI. Last year was particularly tough: the US writers’ strike put big productions on hold and organic growth slowed to just 6 per cent. Until EQT arrived on the scene in May, the shares had fallen 60 per cent from their 2021 peak.
The trouble was that Keywords had relied upon its high valuation to continue a roll-up strategy. It had hoovered up more than 60 bolt-on businesses since 2013. Its bid to consolidate the sector was a lot easier when its shares were trading at a 40 times multiple of forward earnings in 2021, more than a 100 per cent premium to the rest of the sector.
That valuation had sunk to just 10 times prior to the bid. In part that is down to broader troubles on the UK’s small-cap AIM market, which is trading at a record discount across the board. EQT’s offer, pitched at 22 times 2025 earnings, is still below the average since listing in 2013.
Shareholders are unlikely to complain. Without a solid valuation, Keywords’ strategy seems a non-starter. There is still plenty to go after: Keywords is the biggest company providing services to video games makers but its current market share is estimated at just 6 per cent globally.
Given the cold shoulder from the stock market, private ownership looks the best way forward. Extra capital from EQT should get the roll-up strategy spinning faster. And if AI is going to change game outsourcing, Keywords will have the financial power to lead, not to follow.
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