iDreamSky in Talks to Buy Gaming Company Leyou for $1.4 Billion

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iDreamSky Technology Holdings Ltd. (HKG:1119) – the holder of exclusive publishing rights in China for popular titles such as Subway Surfers and Temple Run – is reportedly negotiating a takeover of its contender Leyou Technologies Holdings Ltd. (HKG:1089) for about $1.4 billion, according to the reporting by Bloomberg.

The Tencent-backed iDreamSky is currently seeking additional financing for the transaction from potential partners that include private equity firms along with other gaming companies. Additionally, the firm has already tapped Credit Suisse Group AG (SWX:CSGN) as one of the financiers in this takeover.

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As a refresher, Leyou first expressed its openness towards a takeover back in September as it pursued tentative consultations with potential investors. Thereafter, Bloomberg reported in November that Bain Capital, CVC Capital Partners and KKR & Co. (NYSE:KKR) along with a host of gaming companies had expressed interest in Leyou. In a filing last week, the firm revealed that its controlling shareholder Charles Yuk – who owns a 69.2 percent stake in the company – has signed a memorandum of understanding with an unidentified party to sell his majority stake in Leyou. As part of the agreed upon arrangement, the unidentified party has been granted a 21-day exclusivity period to conduct due diligence before a formal agreement may be signed.

The filing also revealed a tentative agreement that will be made a part of the final deal, whereby, Charles Yuk will be transferred Leyou’s interests in select offices within Hong Kong’s Lippo Centre. Mr. Yuk will also continue to provide financing for the development of certain games.

Leyou debuted at the Hong Kong stock exchange in 2011. It is known for owning developers such as Digital Extremes (Warframe) and Splash Damage (Dirty Bomb). Additionally, it is currently working with the tech giant Amazon (NASDAQ:AMZN) to produce a game based on “The Lord of the Rings” fantasy series. Leyou’s other upcoming offerings include Civilization Online and Transformers. The company’s share price has rocketed by as much as 16 percent this year, which gives it a market valuation of HK $7.8 billion ($996 million).

iDreamSky listed on the Hong Kong exchange last year and as of its 30th June interim report, the company boasted a portfolio of 57 games, including 16 role-playing ones. Its co-founder and CEO, Michael Chen, retains the largest proportion of shares in the company with a 25.92 percent stake. Tencent Mobility, a subsidiary of the Chinese tech giant Tencent (HKG:0700), owns the second-largest stake in the Shenzhen-based firm at 18.6 percent. Shares of iDreamSky have plunged by more than 30 percent since the company’s IPO last year, thereby, giving the company a current valuation of about HK $5.8 billion ($740 million).