Embracer Group is coming to an end – lessons abound for games industry

Embracer Group is officially being sunset – with a split into three new companies. The games industry can learn a few things from the company’s trial and error.

Takeaways

• Embracer Group is splitting into three entities and the Embracer name is being retired.
• Embracer has over 900 IPs and ended 2023 with $1.5 billion in debt.
• Embracer CEO Lars Wingefors states debt is not suitable for game companies.
• The federated states model has failed to produce desirable outcomes in its current form
• It is possible that future iterations of the federated states model may work better.

Embracer’s latest moves

Embracer Group CEO Lars Wingefors has announced the company will be splitting itself into three separate entities: Asmodee Group, “Coffee Stain & Friends,” and “Middle-Earth Enterprises & Friends” – with the latter two organizations to receive official renames at a later date. Each new company will have its own leadership team, strategy, P&L, and ticker on Nasdaq Stockholm. The Embracer name is being sunset.

Asmodee Group will focus on physical (tabletop) games, Coffee Stain will focus on indie and AA games, and Middle-Earth will focus on AAA games. Together these companies will have over 900 IPs to work with.

Embracer ended 2023 with a debt of $1.5 billion. Sale of Saber Interactive ($205 million) and Gearbox ($460 million) wiped out much of it, but the remaining debt is still in excess of $960 million. The majority of Embracer’s $900 million debt will mostly move to Asmodee (their physical games group), which has strong recurring cash flow to pay it down.

Lessons to learn

Wingefors admits taking on debt for acquisitions was a mistake in hindsight, claiming that debt is not a good trait for game companies – especially AAA game companies.

Does this mark the end of the federated states model for game companies? Here is a reminder on why this happened: 1) Interest rates were 0% for a decade, so borrowing money was basically free. 2) Most game companies were trading for higher valuations on the public market than on the private market, so a handful of companies took the free money and performed rollups without building any scaled sustainable efficiencies.

Clearly, this wasn’t a sustainable strategy in this case. Does this mean the federated states model is dead as a business strategy? Not entirely. It’s possible future companies will iterate on this to find a version that works, but in it’s current form, it has failed to lead to desirable outcomes.