In conclusion, the reasons are ①Quantitative side: the growth rate in North America is very different from that in Japan and ②Qualitative side: the strategic significance of becoming a platform which provides Japanese IP in North America, taking the lead in the change by Japanese anime IP occurred in amusement arcades in Japan in North America and creating a new market is extremely significant. There is no change whatsoever in our M&A policy.
①Quantitative side: the growth rate in North America is very different from that in Japan
First, it is true that this level of EV/EBITDA 8.5x is relatively high compared to domestic projects in the past. While M&A deals in Japan are possible at attractive valuations in many cases against a background of business succession needs, the same environment is not necessarily the case overseas.
The important point, however, is that we should evaluate not only the multiples on the surface but also take into account the growth rate. For example, in Japan, our M&A projects have achieved a growth rate of 20 to 30% through synergies as we have shown in the past, while the same-store growth rate has been only a few percent. In contrast, NEN, which we acquired in North America last year, has achieved an “average of +201%” same-store growth rate, a completely different performance from that in Japan.
Specifically, although the target company’s most recent EBITDA is $18.2 million, we plan to grow this to $35 million over the medium term. If EBITDA were to double, the effective acquisition multiple would be half as well. One discipline is to make investment decisions without factoring in any future growth. However, it is overly conservative to completely ignore growth potential that has already been demonstrated, and rather risk missing out on investment opportunities that will help maximize shareholder value.
Furthermore, from a shareholder value perspective, we must not forget that we are leveraged. The yield on the investment based on company-wide free cash flow (FCFF) is sufficient in absolute terms (although it is true that domestic projects are very high in relative terms), and we plan to finance the majority of this acquisition with debt, assuming extremely high free cash flow (FCFE) for our shareholders.
The CGS report released today quotes the following: “We analyzed the acquisition ROI of Player One to be approx. 10% on an FCF basis, driven by synergies created through the planned replacement and addition of game machines this fiscal year and next. Additionally, it is estimated that the majority of the acquisition funds (80% assumed) will be financed through debt, and the acquisition ROE is expected to increase to over 60% in the mid-term. From these analyses, CGS believes that the sufficient capital efficiency can be consolidated compared to the cost of capital.” (Page 1 of Capital Growth Strategy Report (PLAYER ONE ROI Analysis) dated April 30, 2025)
If the ROE of 60% as envisioned in the report were to be achieved, we believe it would provide more than adequate returns to shareholders and the management team should not overlook such a project.
②Qualitative side: the strategic significance of becoming a platform which provides Japanese IP in North America, taking the lead in the change by Japanese anime IP occurred in amusement arcades in Japan in North America and creating a new market is extremely significant
The target company was originally owned by Cineplex. Although it was on our long list since then, we could not directly access to it at that time because we did not have sufficient sourcing capabilities in North America, unlike in Japan. As a result, the business was once sold to a PE fund, which we acquired shortly thereafter.
Even though the acquisition price was naturally higher than the one which the PE fund had paid, we believe that there is significant strategic value in acquiring a North American platform of this size in the first place.
The rationale behind the higher acquisition price than the one which the PE fund paid is a growth strategy through PMI utilizing Japanese anime IPs, which is difficult for foreign players but possible for us as a Japanese player. Instead of growing our business performance through existing game machine contents, we will be able to grow by utilizing prize games.
In Japan, prior to 2014, when prize games began to grow rapidly, the market of overall amusement arcade industry was in decline. Since then, however, the prize game market has consistently expanded, with the exception of the Covid-19 pandemic, and amusement arcades have transformed into “platforms anchored by Japanese anime IPs.”
At present, amusement arcades in North America function as a physical playground as same as the ones in Japan before the tipping point in 2014. By leading the transformation of amusement arcades into platforms for Japanese anime IPs, which occurred in Japan in and after 2014, this transaction is not just an M&A for us, but the first step in creating the “future of the North American market.”
Furthermore, the Japanese anime market has continued to expand rapidly, with overseas consumption growing 7.5 times over the past 11 years, finally surpassing domestic consumption for the first time in 2023. This trend is expected to continue to grow.
In contrast, in the North American market, the prize game business utilizing Japanese IP is still immature and supply is not keeping up with demand. With this M&A, we have secured 120 amusement arcades and approximately 12,000 mini-locations in North America. Considering the population size and economic strength of North America, the potential of the North American market is much greater than that of the domestic market, and we have laid the foundation for growth in this untapped market together with Japanese anime IP. As mentioned above, we should not discuss merely in terms of price in this project. We believe that it was a very meaningful investment decision based on the growth rate in the North American market, the creation of an untapped market utilizing Japanese IP, a future roll-up strategy and a long-term perspective to maximize shareholder value.