It’s time to have a real, critical conversation about Ubisoft.

We’ve covered Ubisoft’s disappointments for years, and there are no shortage of half-baked takes about the latest deal with Tencent on LinkedIn. Today, let’s stop beating around the bush and acknowledge some hard truths.

We’ll recap Tencent’s poor deal-making, the failure of Ubisoft’s leadership, and why the company is still going down the wrong path. This was brutal to write, but don’t shoot the messenger. The results (sadly) speak for themselves.

Tencent x Ubisoft: A Recap

Heads around the game industry turned last week when Ubisoft announced it was creating a new subsidiary to house its top franchises, and that Tencent was investing over $1B into it for a minority stake. However, before we explore the implications of this deal, let’s recap Tencent’s involvement with the French firm over the past few years.

The Initial Investment

In March of 2018, on the heels of a failed activist takeover by Vivendi, Tencent (which took a shotgun-like approach to investing into game businesses) acquired a 5% stake in Ubisoft. Given the approximately $9B valuation at the time, that likely translates into roughly a $450M purchase. Sadly, within just a few months of that transaction, Ubisoft’s stock hit what would become its all-time high.

Ubisoft Entertainment Price — *Source: Ycharts*

Since then, the stock price has fallen over 90% — likely about $400M in value destroyed for Tencent. Not great!

Investing in the Family Holding Company

This is where it gets funky. In late 2022, Tencent decided to expand its Ubisoft stake by investing another $297M (€300M) — this time via a 49.9% stake into the family holding company of Ubisoft’s founders, Guillemot Brothers Limited. There were a couple strategic reasons: Tencent would develop mobile games for Ubisoft, and it would open doors for its franchises in China. This hasn’t been fully successful yet, especially given rough early sentiment around Assassin’s Creed Jade, the mobile effort that Tencent’s Level Infinite is spearheading. But there’s still strategic value in the relationship.

All that said, we spotted red flags with this deal at the time:

Tencent was doubling down on an investment it had already lost a lot of money on. Value investing has its place, but in Ubisoft’s case it seemed clear that the company shrunk for good reason. Beside the strategic benefits Tencent would bring to the table, there weren’t obvious long-term catalysts for why Ubisoft would rebound to being a big winner.
By investing through the family holding company, which itself owned a large stake of Ubisoft, Tencent indirectly increased its ownership in Ubisoft but did so in a way that entrenched the Guillemot family’s control. This structure gave the family more voting rights over a larger percentage of Ubisoft’s business. In general, investing by that point up to $750M and waving some voting rights seemed irresponsible. Giving more control to the family that led to the company’s recent troubles was questionable, and it would make accountability for future poor performance nearly impossible to rectify.
Tencent bought this stake at an eyebrow-raising 86% premium to the market rates at the time. In euros, the share price was €43, and Tencent bought in at €80. Today, it’s €10.70.

In short, Tencent not only lost hundreds of millions of dollars again, but it did so at questionable terms and cemented the control of the family that has overseen Ubisoft’s downfall. Also not great!

Investing in Ubisoft’s Subsidiary

It gets even funkier. Ubisoft just announced it’s creating a new subsidiary to house its three most coveted brands: Assassin’s Creed, Far Cry, and Tom Clancy’s Rainbow Six Siege. The rest of Ubisoft’s games and assets (The Division, Just Dance, Watch Dogs and others) will remain with the parent company, the parent company will own 75% of this subsidiary, and Tencent will spend another $1.25B to buy the other 25% stake.

The deal details hold other nuances (read the full press release here), and there’s also much we still don’t know. But in essence:

Existing shareholders will continue to own Ubisoft the same as before, and that holding will soon own only 75% of the business of those three leading franchises.
Tencent will maintain its stake in Ubisoft (the parent company) and largely increase its position via the franchises that matter most.
Employees working on those three franchises will likely get ported to the subsidiary, perhaps along with some others for support functions. The details are still unclear, but there’s been no word of layoffs yet. That said, a large restructuring might provide a legal opening to make outsized employment changes.
It’s unclear what financial assets will port over to the subsidiary. Will they keep it cash rich or load it up with debt? I imagine it’ll have solid financial footing given the $1.25B Tencent will provide.

Here’s the strategic rationale that’s been outlined: “Backed by greater investment and boosted creative capacities, it will drive further increases in quality of narrative solo experiences, expand multiplayer offerings with increased frequency of content release, introduce free-to-play touchpoints, and integrate more social features.”

I’m skeptical. Corporate spin aside, there’s frankly no reason this is only possible in a new subsidiary. So why structure it this way? Well, with previous deals as our guide, this structure still keeps the Guillemot family in control. Also, Tencent is back paying far above market rates for its ownership. Paying $1.25B for a 25% stake values the subsidiary at $5B, and many people are freaking out about this because Ubisoft in its entirety is currently valued at $1.4B in public markets.

What’s important to understand is that just because Tencent and Ubisoft agree to a valuation, it doesn’t make it “real” when it trades publicly. (Also, for those counting, Tencent will have invested $2B into a company that currently trades for 30% less than that.)

On the surface, it appears to be a beneficial deal for Ubisoft. The company is raising nearly its entire valuation in cash for minimal dilution, still isn’t giving up control, and that cash might make a big difference given the parent company has approximately $1B in net debt.

I genuinely can’t explain why Tencent continues to gruesomely overpay for its Ubisoft holdings, so please respond to this email if you have a clear answer. However, if the definition of insanity is "doing the same thing repeatedly and expecting different results," that feels a lot like Tencent’s investments in Ubisoft. Will the next time be any different?

A Reality Check, and What’s Next

Here’s my take: Ubisoft’s demise is a failure of leadership, primarily of the CEO. In my opinion, the CEO’s job is to have good judgment, position their company well for the future, and make the hard decisions no one else can. In Ubisoft’s case, the CEO has failed to do this, despite building an iconic publisher — which is incredible and deserves respect. It’s time for new leadership.

All of these transactions paint a picture of a family that refuses to let go, and the bizarre complexity and PR speak around subsidiaries and investments into the family holding company is a distraction from the fact that Ubisoft’s most important business priority, besides making awesome games, should be to get fit as an organization.

Everyone knows that Ubisoft is massively bloated. Ubisoft has approximately 18,000 employees with a LTM revenue per employee of roughly $130K. Using approximations, this compares to EA’s about 13,000 employees at a revenue per employee of around $530K and Take-Two’s roughly 12,000 employees at a revenue per employee of about $450K. EA and Take-Two are both 25 times larger in terms of market cap as a result of this delta. Ubisoft’s efficiency has mildly improved over the past couple years, but there’s no excuse for still having this level of bloat.

So what’s next? Well, we don’t know with certainty, but this subsidiary deal looks like a stepping stone to another transaction. The amount raised isn’t nearly enough to take the company (or subsidiary) private. But could the subsidiary spin off into its own public company (and unlock more value as a result)? Maybe. Would the subsidiary make for a better buyout by another publisher, and then the rest of the business gets taken private — or vice versa? Maybe. There are options. Of course, for Tencent to make money on this latest deal, it would require an eventual over $5B exit of the subsidiary, which perhaps limits the viable options. But perhaps it doesn’t matter to Ubisoft’s leadership given Tencent has no control anyway.

It’s possible that we are nearing the end of Ubisoft as we know it. However, what I haven’t seen be discussed at all is that it genuinely does not need to end this way. Getting fit as one united company is still a much better idea than likely staying unfit as two separate companies. And it's still not too late to change course, especially since the subsidiary deal hasn’t closed yet.

Yes, getting fit would be hard and painful. It would require further streamlining the product portfolio, several thousand layoffs, maybe raising some capital (which Tencent seems eager to give), and raising standards with new leadership to become more competitive in the future. All that said, it’s not impossible. It doesn’t break any laws of physics, and other companies have done similar things.

Many people will point to French employment laws as a major roadblock, but keep in mind that the majority of Ubisoft’s employees are based outside of France. That said, perhaps one reason to restructure is to create a legal opening for larger cost reductions to be permitted, but that alone is not a good enough reason to not have become more efficient.

To Ubisoft’s credit, it has been targeting €200M in cost reduction between FY2025-26 versus FY2022-23. That said, Ubisoft likely pays well over €1B in compensation alone, and that’s before counting any inefficient R&D sprawl, facilities, agency partners, and so on that add up to nearly €1.9B in annual operating expenses. A 10%-15% cut over three years is fine, but it could easily be double or triple that to get closer to the efficiency of other leading publishers.

If Ubisoft doesn’t accelerate getting fit, then it only delays the inevitable, regardless of structure. If Ubisoft breaks itself into pieces and raises money from Tencent, it solves nothing fundamental. New structures and ownerships in and of themselves do nothing to reduce bloat and level up leadership. It also doubtfully empowers the best talent to make the best games any differently. If Ubisoft goes down the subsidiary path and follows it up with other deals, then it just means that its product suite and employee base will need to get streamlined later across more entities — and likely in a more haphazard and confusing way.

In 2023, we wrote: “Instead of taking steps in the right direction, [Ubisoft] should, and can, be making leaps ... The option exists if management is brave enough to make big, hard decisions.” What I believed then, and still believe now, is if Ubisoft rights the ship, it will become one of the highest performing gaming assets of the next 5-10 years. A tremendous turnaround opportunity is there for the taking, and I want Ubisoft to take it.

Unfortunately, management has so far not shown the required courage to turn things around, and that’s both a shame and a choice. It’s still a choice. Unfortunately there’s little anyone but the Guillemot family can do to turn Ubisoft around — except for maybe Tencent to pull its funding. Again, it’s possible this restructuring is a stepping stone to both another deal and a catalyst for acquiring the legal permission to get fit at scale, but there’s long been room for improvement.

Regardless of what happens to Ubisoft from here, hopefully other leaders are paying close enough attention to avoid making similar mistakes. It would be a shame if more leading publishers lose relevance because they can’t make transformatively hard decisions and recognize when it’s time to let go. In the meantime, I’ll be rooting Ubisoft on — and will get back to enjoying Assassin’s Creed Shadows.

(PS: Naavik offers M&A and investment advisory services. Our team would love to help you make great deals and investments — and avoid the bad ones — so make sure to learn more and reach out here.)

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