(News Bulletin 247) – The group controlled by the Guillemot family has issued bonds convertible or exchangeable into new or existing shares amounting to 495 million euros. Which seizes the market, due to the potential dilution linked to this instrument.

Ubisoft’s call to the hybrid debt market causes its stock to plunge. The video game publisher fell on the Paris Stock Exchange this Tuesday, showing a drop of 8.8% around 10 a.m., to 26.82 euros around 10:45 a.m., the most pronounced decline in the SBF 120.

The company announced Tuesday morning that it had placed 494.5 million euros worth of so-called “Oceanes” bonds, a nice name which means “bond with the option of conversion and/or exchange into new or existing shares” (this is is less sexy, we grant you that).

These hybrid debt instruments allow investors who have subscribed to these bonds to convert their debts into shares of the group, if the price crosses a certain threshold, otherwise repayment takes place in cash.

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Risk of dilution

As part of the Oceanes issued by Ubisoft, the conversion or exchange price has been set at 40.3413 euros, which represents a premium of 47.5% compared to a reference price of 27.35 euros.

Ubisoft will use the proceeds from this bond issue to repurchase half (250 million euros) of a previous Oceanes issue, carried out in 2019 and maturing in September 2024. The remainder will be used to finance the general needs of the company .

“The success of this convertible bond, with a maturity of 8 years, a first for Ubisoft and a first since May 2019 for an unrated European issuer, coupled with a coupon of 2.875% and a conversion premium of 47.5% , underlines investors’ confidence in Ubisoft’s credit quality as well as its long-term value creation potential,” Frédérick Duguet, Ubisoft’s financial director, said in a press release.

The fact remains that these hybrid debt issues often tend to heat up the market, quite simply because they are synonymous with a risk of dilution for shareholders.

Ubisoft makes this clear. By way of illustration, the company explains that if all of the bonds were converted into new shares, the potential dilution would amount to 9.6%.

However, this assumes that Ubisoft shares rise and therefore exceed 40.3413 euros. During the issue of Oceanes 2024 carried out in 2019, the conversion price was set at 114.14 euros (compared to a Ubisoft share price currently around 27 euros). These Oceanes are therefore largely “out of the money”, i.e. the price of the underlying share is lower than the conversion price of the bonds into shares.

“Knowing that the Oceane 2024 was largely out of the money, the new Oceane 2031 will have a significant dilutive impact which should weigh this morning,” explained Invest Securities in a market update published before the opening of the Stock Exchange.

Many releases to come

“Several points can explain the decline in Ubisoft shares this Tuesday: there is the potential dilution and there is the fact that this Oceane carries a coupon while it partly refinances a zero-coupon bond, which therefore increases financial charges. Furthermore, technical elements can come into play: investors can decide to sell the share to buy bonds”, explains a Parisian analyst.

Beyond these purely financial elements, the evolution of Ubisoft’s stock will depend on the good reception of its recent and future “AAA” releases (blockbusters in video games).

After the arrival of Assassin’s Creed Mirage at the beginning of October, the game Avatar: Frontiers of Pandora based on the Avatar film franchise will arrive in December, followed in January by the new Prince of Persia, then by Skull and Bones, Ubisoft having announced Thursday evening that The release of this pirate game was now planned between January and March of next year.

This catalog of releases is double-edged because it could certainly allow the publisher to sign its best year in terms of sales (according to UBS which expects 30 million game units sold).

But all this will depend on good reception from the public, while increased competition from other publishers this year and the deterioration of macroeconomic conditions risk pushing gamers to be selective in their choices.

On Monday, the independent research firm AlphaValue significantly reduced its price target to 49.3 euros compared to 58.9 euros previously on the value, so as to reflect weaker demand and a risk of tightening household spending.

“Gamers have already become more selective (preferring high-end, long-running games), while the strength of Ubisoft’s back-catalog revenue in the first half of its 2023-2024 fiscal year could indicate that they (gamers) gamers, Editor’s note) “swap” new games for older (and cheaper) games,” AlphaValue explained.