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posted: 2/22/2014 8:06 AM

Opinion: Candy Crush's maker doesn't really want your money

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  • The King Digital Entertainment Plc logo and "Candy Crush Saga" game are displayed on an Apple Inc. iPhone 5s and iPad Air in this arranged photograph in Washington, D.C., U.S., on Tuesday, Feb. 18, 2014. King Digital Entertainment Plc, the maker of popular smartphone games including "Candy Crush Saga" and "Pet Rescue Saga," is beginning an adventure of its own on a path to becoming a public company.

      The King Digital Entertainment Plc logo and "Candy Crush Saga" game are displayed on an Apple Inc. iPhone 5s and iPad Air in this arranged photograph in Washington, D.C., U.S., on Tuesday, Feb. 18, 2014. King Digital Entertainment Plc, the maker of popular smartphone games including "Candy Crush Saga" and "Pet Rescue Saga," is beginning an adventure of its own on a path to becoming a public company.
    Bloomberg News

 
By Matt Levine, Bloomberg News

Apparently, all financial journalists spend most of their time playing "the addictive puzzle game Candy Crush Saga." Except me; I've never played it, but I am nothing if not desperate to fit in so here is a post about the initial public offering document that Candy Crush's maker, King Digital Entertainment Plc, filed today. Because King's IPO is also sort of an addictive puzzle game!

Here are some delightful facts from the prospectus:

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• The company had operating cash flow of $708 million in 2013. The company had cash of $409 million at the end of 2013. The company has paid $504 million in dividends to its current owners (led by Apax Partners) in the last four months: a $287 million dividend in October and a $217 million one two weeks ago. It has filed to sell up to $500 million worth of stock, in a currently unspecified split between primary (new shares issued to raise cash for the company) and secondary (existing shares sold by current shareholders to cash out for themselves).

The use of proceeds for the primary shares is something of an embarrassment: The principal purposes of this offering are to create a public market for our ordinary shares, facilitate access to the public equity markets, increase our visibility in the marketplace, as well as to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include acquisitions. We have not allocated any specific portion of the net proceeds to any particular purpose, and our management will have the discretion to allocate the proceeds as it determines.

Or, as the chief executive officer puts it in his letter in the prospectus, under the heading "Why we're going public": "As you'll see in the financial results section of this document, we have a substantial cash position and no debt, and we have been cash flow positive since 2005. Going public creates a liquid market for our current and future employees and equity holders and will give us greater flexibility to act on strategic opportunities if they arise in the future."

I giggled a little at this IPO for its naked pointlessness: Not only does King not need to raise $500 million of equity to fund its business, it doesn't even need to raise $500 million of equity to fund the $500 million it just paid out to its existing equity investors. (It's a stock-financed dividend! Why not.)

Its business is throwing off more cash than it knows what to do with, or rather, it knows exactly what to do with it, which is to shovel it at its private equity owners as fast as it comes in. It's not going public because it needs more cash; that's the last thing it needs. It's going public because mumble mumble mumble flexibility to act on strategic opportunities mumble. And so its owners can cash out a little more than they did earlier this month, and also in October.

But you can't really blame them. I mean, strategic opportunities, sure, why not, but also, really, the time to sell stock is when you have a massive viral hit on your hands and it's just starting to -- umm, the word is "season," meaning "become boring" I gather, or "not sell as well as it used to."

The goal of private equity is to nurture companies away from the vagaries and short-termism of public markets until they reach their peak attractiveness to public markets, then sell out at the top. Apax's timing here is hard to argue with.

It does feel weird, though. One model for the corporate life cycle is that venture capital funds a company's early growth, but eventually the company grows up, needs more money, and needs to give its employees some liquidity.

So it goes public with a small but growing business, and deals with the vagaries of the public markets, with their constant demands for earnings growth. Eventually it becomes a mature company with strong steady cash flow but a declining business, and it gets bought out by a private equity firm with the discipline to make it send that cash flow to shareholders rather than wasting it on building noncore businesses to prolong its corporate life.

This is almost the reverse: King Digital has been around since 2003 and has been cash flow positive since 2005. Its revenues and profits peaked in the third quarter of 2013 and declined in the subsequent quarter.

• Now would be a great time for some buyout firm to come along, buy King away from the growth-obsessed public markets, keep costs low, and run it as a cash cow until the casual gaming business stops being profitable. It's strange to see King going in the other direction.

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