Candy Crush maker King Digital shares sour in market debut

By Neha Dimri and Malathi Nayak

(Reuters) - Shares in King Digital Entertainment Plc fell as much as 15 percent in their Wednesday debut, underscoring concerns about the company's reliance on "Candy Crush Saga" and dashing hopes its coming-out party would revive investor interest in the mobile gaming industry.

Mobile gaming executives had looked to London-based King's IPO, the largest by a gaming company since Zynga Inc went public in 2011, to help sweep aside scepticism over a notoriously fickle, volatile market.

But King's shares fell to a low of $19.08 (11.51 pounds) in morning trade from their IPO price of $22.50, which had valued the company at about $6 billion.

The company offers over 180 games but its two-year-old "Candy Crush Saga" game, in which users move candies to line up at least three of the same colour, accounted for over three-quarters of King's revenue for the last three months of 2013.

"Once you have a hit, it's hard to make a string of hits. How many bands were the Beatles?" Roger Kay, analyst at research firm Endpoint Technologies Associates said. "Also, there've been a lot of high priced IPOs and mergers and acquisitions (of late) and when valuations get frothy, investors get disappointed when returns don't measure up to expectations."

Candy Crush, a free game, is now a household name and has been downloaded more than 500 million times since its launch on mobile devices. Using the "freemium" model, King makes money by selling players extra lives and other add-ons.

King's dismal debut dragged down other gaming stocks on Wednesday. Zynga shares fell 4.5 percent, while smaller player Glu Mobile slipped 2.3 percent.

Zynga debuted in 2011 with about the same valuation as King, but its stock ended down 5 percent on opening day.

Zynga's market value has since shrunk to just over $4 billion, falling victim to concerns about the danger of investing in companies that rely heavily on a hit game.

"This was mispriced," Stern Agee analyst Arvind Bhatia said of the King debut. "There are a lot of IPOs in the pipeline so investors are not starving...and are being picky. Today's action also says investors are not going to ignore fundamentals."

King's shares were down 11 percent at $20.07 midday. JP Morgan, Credit Suisse and BofA Merrill Lynch were the lead underwriters for the offering.

PROFITS, SO WHAT?

King sold 15.5 million shares of the 22.2 million offered, with the rest coming from stakeholders including private equity firm Apax Partners, which remains the biggest shareholder. King raised about $500 million in its IPO.

In February, King said an average 144 million daily active users played its games more than 1.4 billion times per day.

The company has been profitable for several years but had a rocky start.

King, formerly known as King.com, was saved from bankruptcy by a last-minute infusion of capital on Christmas Eve 2003. It finally turned a profit in 2005 and has made money ever since.

"Candy Crush," which was first launched on Facebook in April 2012, was released on Apple devices in November that year and on Android devices a month later.

The spectacular popularity of "Candy Crush" helped King generate revenue of $602 million in the fourth quarter of 2013, up from $22 million in the first quarter of 2012.

The company says 1 trillion candies have been crushed so far and users have racked up 103,000 years of play time. Two-thirds of players are women. (http://link.reuters.com/jyv87v)

The stock's less-than-impressive debut will be noted by youthful rivals such as San Francisco-based Kabam and Kixeye, known for strategy games like "Kingdoms of Camelot" and "War Commander", which are looking to make market listings or secure new financing.

However, unlike most other tech companies that have gone public recently, King is profitable, has no debt and generated positive cash flow from operations for each of the last nine years. It posted profit before tax of $714.3 million in 2013.

Apax will retain a 44.2 percent stake in the company, if underwriters fully exercise their option to buy shares.

Chief executive Riccardo Zacconi, who has led King since co-founding the company in Sweden in 2003, will hold a 9.5 percent stake.

(Reporting by Neha Dimri and Anil D'Silva in Bangalore and Malathi Nayak in San Francisco; Editing by Savio D'Souza, Ted Kerr and Meredith Mazzilli)