Tencent in exclusive talks to buy Hong Kong gaming firm Leyou

Chinese tech giant Tencent is in exclusive talks to acquire Leyou Technologies, the Hong Kong-listed games developer announced on Friday.

Leyou has a number of subsidiaries which make video games. It is most well-known for “Warframe,” a title created by subsidiary Digital Extremes.

It has also announced plans to bring out a game based around “The Lord of the Rings” franchise and is co-developing the upcoming title with Amazon’s gaming division.

Leyou and its controlling shareholder, Charles Yuk, have entered into an exclusivity agreement with Tencent Mobility Limited, a Tencent subsidiary, Leyou said. Tencent Mobility is looking to buy Leyou and take it private.

Piers Harding-Rolls, head of games research at Ampere Analysis, noted that Leyou began life as a food processing company before pivoting to games and buying up developers like Digital Extremes and Splash Damage.

“My view is that it is looking for a buyer because its main service game Warframe suffered in 2019 due to a slow update cycle and new competition,” he told CNBC by email Friday. “Although it has a growth strategy for the title, it will need investment in development to drive engagement.”

The exclusivity agreement means that Leyou and Yuk won’t be able to negotiate with another potential buyer in the next three months while the Tencent talks are ongoing. Leyou said the negotiations were still in progress and that there was no certainty the talks would lead to a binding deal.

The firm had earlier halted trading in its shares pending an incoming takeover announcement.

In the past few years, Tencent has bolstered its gaming portfolio via investments in other firms. For example, it acquired most of Finnish mobile game maker Supercell in 2016 and took a stake in “Fortnite” creator Epic Games in 2012.

An acquisition of Leyou would help Tencent further expand the number of games under its huge umbrella as it faces increasing competition from Chinese rival NetEase.

NetEase, which is listed in the U.S., carried out a secondary listing in Hong Kong, last month, raising 21.09 billion Hong Kong dollars ($2.7 billion). That money will be put toward international expansion which means NetEase and Tencent will go head-to-head in the global games market.

The news comes after a Bloomberg report last week said that Sony was considering a bid for Leyou. The Japanese gaming giant recently announced a $250 million investment in Epic Games.

Sony has been aggressive in bolstering its access to key intellectual property ahead of the launch of its flagship PlayStation 5 console slated to be released later this year. Last month, the firm unveiled the design of its next-generation device and a line-up of well-known games that will be released.