ByteDance in talks to buy stake in mobile games firm CMGE

HONG KONG/BEIJING: China's ByteDance is in talks to buy into mobile games publisher CMGE Technology Group Ltd, four people with direct knowledge of the matter told Reuters, as the owner of short video app TikTok moves to strengthen its next pillar of growth.

A CMGE spokesman said the company is not in talks to sell a stake to ByteDance. A ByteDance source said it had held talks with CMGE but was not interested in buying into the company.

ByteDance plans to buy part or all of the 27.6% CMGE stake held by Fairview Ridge Investment Ltd, controlled by CMGE chairman Xiao Jian and vice chairman Sin Hendrick, said two of the people.

The people declined to be identified as the information is not public. Reuters could not reach Fairview for comment.

The talks come as the gaming industry continues to benefit from COVID-19 pandemic countermeasures which have forced people to stay at home, boosting game downloads.

ByteDance is looking to offer HK$4 to HK$5 ($0.52 to $0.64) per share to purchase the stake, said another person. The range represents a premium of 30% to 62% above the stock's Monday close of HK$3.08.

Following the news, CMGE's stock reversed losses and rose as much as 21% to HK$3.75 in Tuesday afternoon trade - their highest since mid-October, before closing up 1%.

Xiao and Sin are the biggest shareholders of Hong Kong-listed CMGE, holding 33.9% and 32.6% respectively through a number of entities, regulatory filings showed.

A 27.6% stake is worth $275 million, Reuters calculations showed based on CMGE's market capitalisation of $997 million on Monday.

Eight-year-old ByteDance has identified gaming as its next strategic growth area and has been scouting for investment opportunities for months to build up its gaming portfolio, three of the people said.

Market leader Tencent Holdings Ltd proposed a $1.5 billion acquisition of Leyou Technologies Holdings Ltd in August. That made CMGE more of a target for ByteDance, said two of the people.

A successful transaction could make ByteDance CMGE's single largest shareholder, said one of the people. The deal is yet to be finalised and is subject to change, the person said.

ByteDance has already been relatively successful with casual mobile games that mainly make money through advertising. It plans to release its first "hardcore" game in the April-June quarter, said two other people with knowledge of the matter.

Hardcore games can be a steady source of revenue as users tend to keep playing popular titles for years and are willing to make in-app purchase for items that enhance game play, such as weapons.

CMGE boasts the second-largest intellectual property reserves among Chinese games firms after Tencent, and counts "The Legend of Sword and Fairy" and "Xuan-Yuan Sword" in its portfolio. It has exclusive licensing agreements with ByteDance for two titles - "The King of Fighters: All Stars" and "One Piece: The Voyage".

ByteDance entered gaming in early 2019 with casual titles. By the end of last year, 13 of its games had became hits on Apple Inc's App Store in China. It has a games division with around 2,000 employees working on hardcore games.