LONDON, May 24 (Reuters Breakingviews) - A communications glitch is raising credibility questions at video game giant Embracer (EMBRACb.ST). Shares in the $3 billion company, whose empire spans shoot-’em-ups to board games, tumbled nearly 45% on Wednesday morning after a mystery “groundbreaking” partnership agreement fell through.

It’s hard to speculate on the details of the “agreement”. Gaming companies occasionally make games in partnership with media giants that control popular intellectual property – like film, TV or comic book characters – but lack the knowhow to create video games. Conversely, a hot developer may sign a deal to produce exclusive content for a specific video game marketplace, like the Epic Games Store. What’s certain is that Embracer’s communications strategy raised the hopes of shareholders: it described the deal as “transformative”, and said on Wednesday that it had expected it to include some $2 billion of contracted development revenue over six years. It initially expected the whole or parts of the deal to close in its 2022-23 financial year; that was then delayed to the first quarter of 2023-24; and finally the deal fell apart late on Tuesday night.

Embracer’s latest profit warning will also irk shareholders. It said on Wednesday that adjusted operating profit for the current financial year would likely be between 7 billion and 9 billion Swedish crowns ($650 million and $840 million), from 10.3 billion to 13.6 billion Swedish crowns previously. That’s a blow to investors already dealing with a tough gaming market. Among those is Savvy Games, owned by Saudi Arabia’s Public Investment Fund, which bought a roughly 8% stake for 103 Swedish crowns a share in June last year, versus a share price of roughly 23 Swedish crowns on Wednesday morning. Taking into account the share price fall, Embracer’s enterprise is valued at around 3 times its expected EBITDA for the current financial year, using analyst forecasts compiled by Refinitiv, versus an average of around 18 times for U.S. peers Take-Two Interactive Software (TTWO.O) and Electronic Arts (EA.O). Communication failures and profit warnings will make closing that gap a tough level to beat. (By Oliver Taslic)

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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Editing by Aimee Donnellan and Streisand Neto

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