Games Workshop entering a treacherous world with Warhammer-Amazon deal

Like the Skaven mounting an expedition across the scorched Dark Lands, Games Workshop Group PLC (LSE:GAW) is entering territory fraught with dangers.

Following two years of deliberations, the Warhammer 40,000 owner has formally granted Amazon.com Inc (NASDAQ:AMZN) exclusive rights to adapt its prized intellectual property into film and television content.

With the agreement, Games Workshop is putting its reputation – and 40 years of goodwill among loyal Warhammer fans – on the line.

What’s at stake?

Turning beloved, geeky franchises into mainstream content has had a mixed history, to say the least.

Nintendo knocked it out of the ballpark with its recent Super Mario Bros feature film, as did Sega with its Sonic the Hedgehog adaptation (despite initial bemusement at Sonic’s character design).

But it doesn’t always go to plan. Amazon’s messy Rings of Power series was roundly panned by Lord of the Rings fans, and viewership numbers have failed to impress.

HBO’s recent Halo series was dismissed by the video game franchise’s loyal fans, while Netflix’s Witcher series attracted backlash from fans and rumour has it, super nerd sex symbol Henry Cavil abandoned the show due to the showrunners’ lack of appreciation of the source material.

For Games Workshop, the stakes are ostensibly higher.

Since 1983, Warhammer enthusiasts have kept Games Workshop afloat by being loyal customers of its pricey figurines, some of which go for more than £100 each.

The company exists because of a tight-knit base of fans that risks being alienated if their hobby is not given the treatment it deserves in a big-budget adaptation.

Amazon may have redeemed itself from the Rings of Power with the popular Fallout video game adaption, but the risks are still there, as are the potential rewards.

A Games Workshop evolution

As Dan Coatsworth, investment analyst at AJ Bell, stated: “First, it should offer a stream of licensing revenue with very little additional cost borne by the company. 

“Second, it is a showcase for Games Workshop and its products which could win over new fans to its tabletop miniature war games.” Even more so given Cavill’s attachment to the show.

At a deeper level, the licensing deal represents an evolution of Games Workshop as a company.

The partnership is the biggest step Games Workshop has taken to becoming as much a media licensing business as it is a seller of figurines.

While licensing already forms a part of Games Workshop’s income through video games and comic books, it only comprised around 5% of revenues in the last financial year.

Given the minimal cost base associated with licensing, licensing operating profit was closer to 13% of total operating profit.

Games Workshop has long held this IP close to its chest, endeavouring to gatekeep the Warhammer brand from having its appeal diluted.

This, Coatsworth told Proactive, is why the deal with Amazon has taken so long to get off the ground.

“It wants to be sure that any partners uphold the quality associated with the Games Workshop empire. Customers love its IP including Warhammer and they don’t want to see its appeal diluted by simple money-grabbing initiatives,” he said.

But if it goes to plan, there could be more licensing deals on the horizon.

A game changer

According to Coatsworth: “Agreeing terms with Amazon is a game-changer for Games Workshop’s IP strategy.

“The deal in itself could be highly lucrative but it also sends a message to the world that Games Workshop is open to other partnerships if the treatment of its IP is handled carefully.”

It will be years before we find out if Amazon does good by Games Workshop’s prized IP.

In the meantime, the company looks forward to another landmark development- following a 42% year-to-date rally, it will enter the FTSE 100 blue-chip index at the next reshuffle on 23 December.

Overpriced?

Warhammer figurines aren’t cheap. At a 30 times price-to-earnings (PE) ratio on a £4.6 billion market capitalisation, there’s a case to be made that Games Workshop shares aren’t cheap either.

There could be even more price appreciation to come once FTSE 100 inclusion triggers passive investor purchases.

Nonetheless, one can’t help but wonder if, given the potential for licensing revenue growth, Games Workshop will attract takeover interest in due course.

A bid from all-consuming media goliath Walt Disney Co (NYSE:DIS, ETR:WDP) is certainly not out of the realm of possibility.

Though given the Mouse House’s comprehensive dismantling of the Star Wars extended universe, expect Warhammer fans to take up arms against the proposition.