Remedy acquires full rights to the Control franchise from 505 Games at a good price

Translation: Original comment published in Finnish on 2/29/2024 at 6:52 am EET.

Remedy announced on Wednesday that it has acquired all rights to the Control games franchise from 505 Games. The transaction returns to Remedy all publishing, distribution, marketing and other rights relating to Control, codenamed Condor, Control 2 games and future Control products. Our earlier speculation that the financial statements were delayed due to publishing contract negotiations was therefore correct. We see the agreement as very positive for Remedy's long-term potential, as the company is now in a strong position to decide to self-publish future Control games and/or to negotiate with a new publishing partner to finance projects on better terms. We expect the news to give a boost to the stock, which has been in a gloomy mood lately.

Remedy takes full ownership of the Control games franchise at a good price

As a result of the transaction, the publishing agreements for the Control (codenamed Condor) and Control 2 games will be terminated with immediate effect. For Control 2 and codename Condor, all publishing, distribution, marketing, and other rights licensed to 505 Games revert to Remedy with immediate effect. 505 Games will continue as the publisher of Control through a transition period ending December 31, 2024, under the terms of the original Control publishing agreement. In addition, 505 Games continues to administrate existing B2B deals for Control until their agreed expiration dates. After the transition period and the expiry of these B2B deals, 505 Games will have no future royalty or other rights to Control.

The maximum purchase price of the transaction is approximately EUR 17 million, which is the amount 505 Games has paid to date for the development of Condor and Control 2, including a small premium. Remedy is entitled to set off certain receivables from the purchase price and, therefore, the cash flow effect from the transaction will be clearly less than the purchase price. We believe this refers to the royalties generated by the Control game this year, which will already offset part of the purchase price. Remedy will pay the net purchase price in three cash installments during the next twelve months. From Remedy's point of view, the purchase price is very attractive, as the small premium on top of the development costs is virtually the only share the company has to pay for the full management of publishing, distribution, marketing and other rights. We consider Control to be a successful game brand, as evidenced by the 4 million units sold and net sales of over 100 MEUR. With the growing recognition of the gaming brand, we believe Control 2 is well placed to do much better than this. The Condor multiplayer project is an even bigger question mark in terms of its potential at this stage.

Remedy's financial position makes a new partner a likely choice

Remedy commented in the press release that the deal will allow the company to negotiate better deals for current and future Control games. The company can also now weigh the options of self-publishing or finding a new publishing partner for Condor and Control 2. Remedy is also in a better negotiating position than before, thanks to the established position of the Control brand and the success of Alan Wake 2. The company said it is evaluating potential future partners and will be negotiating with them in the coming months.

In view of Remedy's current cash position (Q4'23: 30.4 MEUR) and the purchase price for the Control deal, we believe that the company's resources for the self-release of both Condor (previous production budget 25 MEUR) and Control 2 (previous production budget 50 MEUR) are too thin. While recapitalization is certainly an option, we believe that bringing in a new partner to finance one or both projects is a more likely option. According to the company, several partners consider Control to be an attractive game franchise, so we believe Remedy is in a good position to secure very good deal terms.

The arrangement increases Remedy's long-term potential, but it is difficult to assess the impact on forecasts until new contracts are signed

According to Remedy, the deal will not have an immediate impact on the income statement, but the company sees attractive growth opportunities in the medium and long term. We agree, as Remedy's bargaining position will inevitably allow it to take a larger share of the royalty pot for future Control games than under the previous publishing agreement, which shared costs and revenues equally with 505 Games. The forecasts for the next few years will of course depend on how much risk the company is willing to take in financing game projects. As a result, we are not making any changes to our forecasts at this time based on speculation about possible future contract terms but will review them next time in connection with the financial statements to be published on March 20.

Remedy commented that Condor and Control 2 have progressed well in recent months and expects these projects to progress to the next stages of development in H1'24. In other words, Condor is going into full production and Control 2 into pre-production, which we think is still in line with our expectations for the release schedules of the games (Condor at the end of H1'25 and Control 2 in H1'27).