Eight Capital analyst Adhir Kadve believes PopReach (PopReach Stock Quote, Chart, News, Analysts, Financials TSXV:POPR) is set to reach new ground, maintaining his “Buy” rating and target price of C$1.75/share in an update to clients on Wednesday.
Headquartered in Toronto with a studio in Bangalore, India, PopReach is a free-to-play mobile game company which focuses on acquiring, operating and growing proven and profitable games and franchises. The company has titles including War of Nations, Kitchen Scramble, Smurfs’ Village, Garden of Time and Kingdoms of Camelot.
Kadve’s latest analysis comes after PopReach announced it had entered into a Letter of Intent to merge with digital technology company aggregator Federated Foundry in a C$160 million all-stock reverse takeover with the aim of creating a new media and technology company.
“A key rationale for the transaction will be the synergies PopReach+Federated will be able to derive by building out a next generation advertising ecosystem which brings together strong content and users, via PopReach’s portfolio of 25 games and +1.9mm MAU’s and Federated’s full-stack advertising technology and advertising inventory which delivers a vast number of advertising impressions for direct advertising clients to 1,900 publisher sites,” said Kadve.
Federated Foundry, which was founded on January 25, acquires and operates digital technology companies, with Denver-based push notification advertiser NotifyAI and Austin, Texas-based advertising and media service provider Q1 Media currently in its portfolio, with an additional acquisition of eCommerce and creative advertising technology specialist Crucial Interactive Holdings Inc. in the works.
The proposed deal will see PopReach issue 200 million shares to Federated Foundry shareholders at C$0.80/share, with the ownership mix consisting of 70 per cent Federated shareholders and 30 per cent PopReach shareholders. The new company’s management structure will consist largely of PopReach executives, as Jon Walsh, Christopher Locke and Greg Donaldson will serve in the roles of CEO, President and Chief Financial Officer, respectively, while Ted Hastings of Federated Foundry will serve as the Executive Chairman.
“Ted Hastings and the Federated Foundry team have a strong track record of growth, both organic and inorganic, and a shared philosophy in uncovering, acquiring and optimizing technology assets that drive meaningful returns and cash flows.” said Walsh in the company’s August 17 press release. “The combination of our businesses greatly increases our addressable market, access to capital, and the ability to accelerate value creation for our shareholder bases.”
The proposed merger is the latest event in a busy year for PopReach, which began with the US$5 million acquisition of the Peak Brain Training app from Brainbow Ltd. in March, followed by a US$250,000 asset purchase agreement and licensing agreement with Starbreeze Studios AB for the re-launch of mobile title PAYDAY Crime War.
Meanwhile, PopReach has been working with Hybrid Financial Ltd. to heighten PopReach’s market and brand awareness to broaden its reach within the investment community.
PopReach shares will be halted throughout the merger process as the company works through regulatory requirements tied to the transaction.
“This transaction brings together two established consolidation platforms in free-to-play games and digital media technology, a strategy validated by strong recent precedents in our industry. It not only creates instant critical mass for both of our organizations, but owning cash flowing businesses that provide digital media services, technology platforms, and content, provides the opportunity to capture more margin across the value chain as we fully integrate our operations,” Locke added.
Based on pro forma income statements, Kadve projects the merged company to make US$72.8 million in revenue in 2021 (US$51.5 million annualized revenue from Federated Foundry properties, US$21.3 million from PopReach), with a projected adjusted EBITDA of US$10 million (US$6.5 million from Federated Foundry properties, US$3.4 million from PopReach) to generate a 13.7 per cent margin.
PopReach projects to have US$14.7 million in cash on hand, while the company’s equity value per share clocks in at US$0.59/share (C$0.74/share).
Kadve believes the merger will lead to significant opportunities for the new company, which will look to acquire high quality assets from a broader set of targets based on the combined scale between the two companies.
“We like the transaction as we believe that the combined PopReach+Federated is well positioned to aggressively pursue M&A given enhanced scale as well as building out a strong content and media ecosystem by leveraging PopReach’s portfolio of gaming assets and Federated’s portfolio of media and adtech assets,” Kadve said.
“Given the +$70 million in revenue and $10 million in EBITDA, our back of the envelope calculation suggests nearly 17% EBITDA accretion for NewCo given PopReach’s C$0.63/share price. We assume a 15x multiple on F21 Adj. EBITDA which we derive using a weighted average F21 EBITDA multiple of AdTech and Independent Game Publishers peer groups,” he said.
PopReach’s stock price had a high point of C$1.45/share coming on January 7 but is currently down 56 per cent year-to-date. At press time, Kadve’s C$1.75 target projects a one-year return of 177.8 per cent.
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