Tencent ramps up dealmaking in Europe amid regulatory overhang at home

Tencent Holdings Ltd.'s appetite for international gaming acquisitions has increased in recent years amid tightening industry regulations in China.

Gaming revenue accounts for more than half of Tencent's overall business. With domestic gaming revenue growth increasingly stymied by regulatory limits on gaming by minors and slow title approvals, the company has looked abroad to fuel its inorganic growth.

Europe eclipsed Asia-Pacific as the top geography for Tencent's gaming M&A targets during each of the past four years, according to data compiled by S&P Global Market Intelligence. In particular, Tencent bought stakes in European game studios based in Sweden, Finland, France, Germany, the U.K. and the Czech Republic.

Tencent declined to comment on the number of gaming deals and their geographical split.

* See Tencent's detailed M&A history on S&P Capital IQ Pro. * Use our Transactions Statistics page to run a custom screen of M&A by industry or geography.

While Tencent's domestic gaming revenue is about three times as large as its international gaming revenue, the company has struggled with growth in recent quarters. Tencent posted two consecutive quarters of year-over-year declines for its domestic business in 2022, which the company attributed to fewer game releases, lower user spending and new regulations.

Protection measures introduced by Chinese regulators in 2021 capped the time children under 18 years can spend playing games at three hours a week and limited the times of day gaming is allowed. Regulators also froze the approval of new games between July 2021 and April 2022, which led to delays in releases.

Tencent's international gaming business also saw a revenue decline in the second quarter of 2022, which the company attributed to the international gaming market's "post-pandemic digestion period." At the height of the COVID-19 pandemic and lockdowns, many people turned to gaming for entertainment at home, resulting in a sharp increase in gaming revenue for companies like Tencent and local rival NetEase Inc. That is weighing on year-over-year comparisons as revenue normalizes.

Tencent's latest European M&A play was a deal to raise the company's stake in French video game developer, Ubisoft Entertainment SA, by buying out its privately held holding company, Guillemot Brothers SA. Tencent President Martin Lau said the company plans to bring some of Ubisoft's best-known games to mobile. Ubisoft is known for major gaming franchises such as "Assassin’s Creed" and "Rainbow Six."

Notably, most of Tecent's largest deals since 2019 involved companies based in Asia-Pacific. Seven of its top 10 deals by gross transaction value involved Asia-Pacific-based targets. Two involved targets based in Europe.

The company's largest deal in recent years was a $1.43 billion purchase of Hong Kong-listed video game company Leyou Technologies Holdings Ltd. in 2020. Its second-largest deal was the $1.13 billion acquisition of British game studio Sumo Group PLC in 2021.