Who Needs a Mega-Hit? 12-Year-Old Big Fish Games Sold for $885M

The video game business is notoriously boom-or-bust. Develop a hit franchise, and you can make a ton of money—but the novelty eventually wears off for players, and the clock is always ticking for your next hit.

Seattle-based Big Fish Games has never really found that headline-grabbing mega-hit game, despite being in business for about 12 years.

That means it hasn’t shown the explosive growth of newer companies like Zynga or King, which rode the growth of Facebook and mobile platforms to IPOs over the past few years. But Big Fish has still found a way to make its investments pay off: the private company said Thursday it is being purchased by racetrack operator Churchill Downs, Inc. (NASDAQ: CHDN) in a deal valued at up to $885 million.

Big Fish is getting $485 million up-front for the acquisition, which includes $15 million in stock and about $79 million in cash over three years for Big Fish founder and CEO Paul Thelen.

Thelen

Thelen

Big Fish will be due another $350 million in payments if it hits financial goals for 2015. The price also includes a possible $50 million bonus payment for Big Fish founder and CEO Paul Thelen if Big Fish books $1 billion in gross sales in 2016.

Why is a horse-racing brand like Churchill Downs interested in a casual and social-game studio tucked away in Seattle? Video-game gambling has become a big business, even without the expansion of “real-money” digital gambling that regulators and the industry have danced around for several years.

Big Fish’s lure in that sector is its house-brand casino game, which Churchill Downs said has grown to the fourth-highest-grossing mobile casino game worldwide. That casino presence comes from Big Fish’s 2012 acquisition of Self-Aware Games, an Oakland, CA-based game developer.

That doesn’t mean that Big Fish will be automatically rolled into Churchill Downs’ substantial real-money gambling business, however. On a conference call Thursday, Churchill Downs CEO Bill Carstanjen said Big Fish won’t be simply folded into the parent company’s Twinspires digital gambling business: “Big Fish will get our best attention and effort to ensure it succeeds on its own,” he said.

Churchill Downs also isn’t interested in shipping its new employees to its home base in Louisville, KY: “We want to be very clear: This company’s operations are going to remain in Seattle and Oakland, just as they are now,” Carstanjen said.

Financial analysts questioned whether Churchill Downs was getting into too risky of a business, considering the up-and-down fortunes of Zynga, King, and other hit-driven video game businesses of recent years.

Carstanjen said the lack of one explosively successful title has helped Big Fish grow deliberately over the years, and actually made it more disciplined about development, marketing, and other business fundamentals.

“Big Fish has never had a mega-hit game like Candy Crush or Farmville,” he said. “While a mega-hit game is a nice problem to have, for Big Fish one benefit of never having had one yet is they don’t have a reliance on any one title.”

The acquisition ends an interesting business story for Big Fish, which ex-Real Networks employee Thelen founded in 2002 after coding games in his bedroom.

The company plugged along through the first wave of PC-based casual gaming, before jumping on the social-network and mobile-device gaming trends in more recent years.

There have been ups and downs along the way: In 2012, after Thelen re-took the CEO job from Jeremy Lewis, Big Fish unveiled a new subscription streaming service that it scrapped a year later, along with laying off up to 140 people.

One thing Big Fish has continued to do is grow its sales. As a private company, revenues are calculated in non-standard ways, but Churchill Downs’ presentation to investors showed impressive growth in “bookings,” a leading indicator for revenues, of $312 million for the past 12 months. That compares to $278 million for all of 2013.

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