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Silverstar Holdings is focused on acquiring business in the
interactive entertainment software industry where there are substantial opportunities to
rollup middle market companies that have become orphans because of consolidation at the
higher end of the market
Financial
Diversified Investment
(NASDAQ: SSTR)
Silverstar Holdings Ltd.
1900 Glades Road, Suite 435
Boca Raton, FL 33431
Phone: 561-479-0040
Clive Kabatznik
CEO and President
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published - March 1, 2007
BIO:
Clive Kabatznik, CEO and President
Clive Kabatznik is Founder and has served as a Director, President since inception and
as a Vice Chairman, Chief Executive Officer and Chief Financial Officer of Silverstar
Holdings, Ltd., since October 1995.
Mr. Kabatznik has served as President of Colonial Capital, Inc., a Miami-based investment
banking company that specializes in advising middle market companies in areas concerning
mergers, acquisitions, private and public agency funding and debt placements.
Current Affiliations:
- Associate Member, Board of Governors, Hebrew University of Jerusalem, Israel.
- National Board Member and Investment and Campaign
Committee Member, American Friends of the Hebrew University, United States.
CEOCFO: Mr. Kabatznik, you founded
Silverstar some time back, what is the current focus for the company?
Mr. Kabatznik: “Currently we are
focusing on acquiring businesses in the interactive entertainment software industry, which
is the computer game industry. We think there is a substantial opportunity to roll up and
acquire middle market companies in the industry. This is due to the fact that the middle
market companies, which generate between $5 to $50 million revenue, have become orphans
because of the consolidation at the higher end with the giants like Electronic Arts (EA)
(NASDAQ: ERTS) and Activision, Inc. (NASDAQ: ATV) and THQ Inc. (NASDAQ: THQI). The small
companies do not have access to distributors for their products, because the products do
not have interest to the larger players and their shareholders do not have an exit
strategy because the larger players also want more critical mass to have an interest in
acquiring these companies. Therefore, we thought there was an opportunity within the
framework of a small market cap company to build and acquire critical mass in the industry
for ourselves to become large enough to become an industry factor and potentially be a
viable acquisition candidate for a larger player in a few years’ time.”
CEOCFO: Will you tell us about the companies
you have acquired?
Mr. Kabatznik: “In 2005, we bought a
company called Strategy First Inc. in Montreal, which is the publisher of PC products
primarily focusing on the strategy space in the PC world. We bought the company out of
bankruptcy, which was an inexpensive way for us to validate our industry strategy, get our
feet wet in the industry and learn a bit more about the industry space. We paid $1 million
for it and took the business from essentially zero to about $4 million in revenues. It is
a niche PC software business, so we do not see huge organic growth from that business
unless we can somehow segue into a broader market space beyond the PC strategy niche.
However, it did serve its purpose in terms of being a start-up business that we could get
our arms around, understand the industry and move forward from there. The second business
we bought in December of 2006 is a much larger company called Empire Interactive PLC,
which was listed on the AIM (part of the London Stock Exchange). It was founded about 19
years ago in London and is a fully-fledged mass-market developer and publisher of games
across a broad variety of platforms. Not only do they do PCs, but they also do consoles
and handhelds. Therefore, we are developing and publishing products for platforms like the
Sony Corporation’s (NYSE: SNE) PlayStation® to Microsoft Corporation’s (NASDAQ:
MSFT) Xbox, and Xbox 360 for the handheld consoles, the DS for Nintendo Company, Limited
(NASDAQ: NTDOY) and PSP for Sony as well as more traditional computer games. Empire also
has a good positioning in terms of a European distribution presence. Hence, we are truly a
business with an international presence in this industry, which is key because it is a
global industry and a strong presence in Europe is very important. Empire is a business
that does about $40 million a year in revenues. Our combined group is, therefore, in the
mid $40 million in terms of sales. In addition, we see significant opportunities to
further grow the business both organically and through acquisitions.”
CEOCFO:
What does Silverstar add to Empire?
Mr. Kabatznik: “Empire is in a
paradoxical situation and this is one of the reasons why there is an opportunity to
acquire businesses. Typically, a person or a manager who is good at building and selling
games is not ideally a manager who is good at running a public company. Empire was a
public company listed on the AIM, but the two founders and principal shareholders of the
business wanted to run a game business; they wanted to deal with games and sell games.
Therefore, they never really focused on street expectations; they certainly did not deal
with investors on a regular basis. In fact, they went public in 2000 and a few months
after going public, they realized what they had let themselves in for and really neglected
the street. Because of this, the assets of Empire were significantly under valued.
Empire’s principal shareholders had no interest in focusing attention on the
street’s regulatory and marketing expectations. They started looking around to
essentially get themselves acquired and taken off the market or acquired and taken private
about a year-and-a-half to two years ago and we came into the process in February.
Therefore, first, the company was significantly under valued because the strength of
Empire’s management was not the direction of public financial ownership of the
company.
Secondly, what we have brought to the company since then is significant additional
firepower to the management team. Specifically I would like to mention Joe Abrams, who is
a now Chairman of Empire and was the founder of a company called Software Toolworks, Inc.,
which in the 1980’s was one of the largest entertainment software businesses in the US.
He sold his business to British publisher, Pearson PLC (NYSE: PSO, LSE: PSON) in 1994 for
$450 million. He also was the co-founder of E-Universe which eventually morphed into
MySpace. Joe is not only well connected in the software business but he is also well
connected in the online business. The other individual we brought in is a fellow by the
name of Geoffrey Heath. Geoffrey is currently CEO of NCsoft Europe (NCsoft Corporation)
which is one of the largest massive multi player game businesses in the world. In
addition, Geoffrey has enormous experience in this industry and his experience is relevant
to this particular situation because the game industry is very similar to the movie
industry as your economics are driven around the releasing of titles and games and the
quality of those releases. The key is to get a decent number of releases every year and to
get quality game releases. One accesses products by either developing them yourself, by
accessing rights, by buying other people’s products, or publishing other
people’s products.
To access these kinds of titles, as in the movie business, it is a relationship type of
things. If you have an executive with a huge rolodex, you can call up and say I hear you
have X product and I would like to distribute for you in Europe or I hear you have Y
product, and we would like to acquire the rights to etc. Therefore, having broad-based
networks of contacts in the industry is hugely relevant to growing a business and having
Geoffrey and Joe and to a lesser extent myself, being active in this business, we are
already seeing some very significant product acquisitions. There will be some
announcements shortly on some major product acquisitions we brought to the table. We are
also doing some significant cross marketing and we have announced an online marketing
initiative for Empire that has been very successful. We are taking Empire to places they
have never been before in terms of their distribution presence because of our contacts. We
are bringing Empire additional products that they would not really access as quickly as we
would have for them. Economics are simple. The business has a steady run rate in terms of
expenses so if you can bring additional products and you can bring additional lines of
revenue by slicing intellectual property in different directions, it becomes hugely
accretive to profits. Obviously, once your fixed overheads are covered, any additional
revenues are very profitable. Therefore, it is a two-pronged answer to your question. One
is that we got away from what they did not like doing and were not doing well. Two, we
brought additional management firepower to increase both the product portfolio of the
company as well as to increase the various ways which we can distribute and sell the
software.”
CEOCFO:
Tell us about FlatOut 2!
Mr. Kabatznik: “FlatOut is the
franchise flagship of the company; it is a racing game, a lot of mayhem, a lot of
interesting racing type of technology. FlatOut was originally introduced about three years
ago and FlatOut 2 came out on PlayStation PS2 in July of 2006. Since its release just over
six months ago, it has sold over one million copies in title on both platforms. In the
game business, selling one million copies today for a mid-sized company is fairly
substantial and in general makes that a viable franchise no matter who you are in the
industry. If you are selling seven figures worth of copies of any particular title, it
says that you have a very successful franchise. Franchises are important because just like
in the Electronic Arts model where they have a Madden NFL football game every year, and
you have an existing user base that continues to buy the product, it works in the same way
for other franchises. If you have a strong existing user base for FlatOut and FlatOut 2,
you can do FlatOut 3 and you can do FlatOut on different platforms. We recently announced
that FlatOut is going to be released on a third generation platform before the end of June
this year (2007). Therefore, we are going to have FlatOut 3, which is tentatively titled
FlatOut Total Carnage, and it is going to come out on a next generation console Xbox 360
and the other next generation console is Sony PlayStation 3. It is going to be coming out
of one of those consoles in its latest incarnation and it is very exciting. It takes
advantages of the technological capabilities of the platform, so we think that will be
another very successful incarnation of the FlatOut franchise.”
CEOCFO:
I would imagine that many software/game developers are good candidates for you!
Mr. Kabatznik: “We think there are.
There is an industry situation which leads us to believe that many companies are
frustrated that they will be stuck without having an international presence and the
ability to break out of this cycle. The key is to find companies with good management, but
in this industry, you want to buy companies that have decent intellectual property
franchise as well. The only real predictive factor that one can get an arm around in the
industry in terms of success of product and games is to look at the history of a
franchise. If a product sold X hundreds of thousands in version 1, you can be fairly
comfortable that it will sell close to that or more than that in version 2. Looking at
these companies, you do not want to do start-ups with a new title; it would be very
difficult to evaluate what it is going to do. You want to buy companies that have
established intellectual property and brand that you can extrapolate some sales on and say
we know that this franchise is going to be worth X to us in the future because it has done
this in the past. Therefore, there are many companies out there, but the ones you want to
focus on are the ones that have ongoing intellectual property with a reasonably good
management team in place.”
CEOCFO:
Executing on an acquisition strategy could be very expensive; what is the financial
situation of Silverstar Holdings?
Mr. Kabatznik: “We have made an
acquisition that has increased the size of our company by ten. We have integration issues,
but we have many opportunities short-term at Empire. People will start seeing the types of
opportunities that we bring to the table and bringing to bear through public announcements
over the next three months. Short term there is enormous opportunity for Empire to expand
their European distribution pipeline. For example, a number of decent sized United States
publishers have already approached us. They do not have a European presence, but would
like to do publishing agreements with Europe. I think that short term there are some
integration issues with Empire, get Empire well bedded down, and get some of these
opportunities into play, which are low hanging fruit for Empire because of their
positioning. Sometime in the second half of 2007, with things moving well in the
operational front, we will look around and see what we can slot in with regards to
acquisitions. We actually do have a couple of companies on our radar screen, but our
attention should be focused on operations over the next three to six months. It is
important for us to make sure that we have Empire moving 100% in the right direction and
exploiting the easy opportunities that are available and then go out and look at some
other acquisitions toward the end of this year.”
CEOCFO:
In closing, why should investors be interested and what does not jump to the surface when
one first looks at Silverstar.
Mr. Kabatznik: “The gaming industry is
a $30 billion dollar a year industry internationally; it is much bigger than the movie
industry. It is a high profile and exciting industry. There are a couple major players at
the top end of the market that are public: THQ Inc., Electronic Arts (EA) (NASDAQ: ERTS),
Ubisoft Entertainment (formally Ubi Soft), Take-Two Interactive Software, Inc. (NASDAQ:
TTWO), etc. These companies are multi-billion dollar market cap companies and clearly,
they are a focus and a magnet for investors who want exposure to this exciting industry.
There are no real players in the public market at our end of the spectrum. Furthermore,
the average valuation parameter for these companies is approximately 2.2 times current
revenues and about 40 times EBITDA. With us doing revenues of about $40 to $45 million
with a market cap of $20 million, there is also a significant valuation gap. This makes
Silverstar an attractive investment candidate. Further, not only are we a lower priced
entry point, but this lower priced entry point has a huge valuation gap based on market
comparables. As we bring numbers and value to the table and awareness of growth to the
public, I think it will only be natural for the valuation parameters to narrow. We think
those are the two issues. We are in a dynamic marketplace. We are one of a kind in terms
of our status in the marketplace and size, but we also are significantly under valued by
industry norms and I think both those factors will take care of themselves as we get the
word out and get more visibility for the company.”
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