Why a Chinese chemicals maker paid $1bn for a cartoon cat

In 2009, a year after Steve Jobs had opened Apple’s App Store, Samo and Iza Login – Slovenian high school sweethearts – decided to get into the app business. They launched Outfit7 with $250,000 in savings. Their early efforts “bombed”, says Adam Satariano in Bloomberg Businessweek. 

But after six months they came up with Talking Tom Cat – in which an animated cat repeats whatever is spoken into an iPhone’s microphone. It was a hit. Titles in the franchise have hit first place in the App Store in more than 100 countries. Outfit7 now earns more than $100m a year via advertising and in-game purchases.

Early last year, the Logins decided to cash out and hired investment bank Goldman Sachs to find a buyer. Rather than a big game studio or even a media company, they were approached by a Chinese chemical maker, Zheijang Jinke Peroxide. The group matched the asking price of $1bn and let the team maintain its autonomy, and the Logins walked away from the deal with $600m.

It sounds strange, but it’s far from the only such “oddball pairing” between Chinese industrial interests and Western entertainment firms, says Satariano. A maker of construction materials bought Framestore, the company behind the special effects in the Harry Potter films, and a Chinese poultry processor acquired game developers Digital Extremes and Splash Damage.

It’s all down to “quirks in the Chinese stockmarket”. Chinese industrial companies trade at very high earnings multiples. By adding on games studios or similar firms with higher profit margins than the main business, they boost earnings and thus their share prices too. So they can afford to pay “bafflingly high” prices. It can’t last – the process is opaque and regulators are cracking down on “acquisitions outside a buyer’s core business”. But the Logins “have little to worry about”. With the proceeds, the vegan couple have achieved their dream of setting up a food-sustainability foundation.

Merryn

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