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FunPlus strikes nearly $1B deal to sell a game subsidiary to a Chinese company

The video game company, whose titles resemble Zynga's FarmVille, is selling four of its games, using the profits to help fund its ambitions to make more.

FunPlus makes games like Family Farm Seaside. FunPlus

Investors sometimes express concern about the health of the video game industry, but consider this: A company you may not have heard of, making games you've may never have played, is about to get a massive windfall.

The video game maker, FunPlus, was founded in 2010 by Andy Zhong, its CEO, and Yitao Guan, its CTO. The company became profitable in 2011. And now, in 2014, it's about to sell most of its business to a Chinese conglomerate for as much as $960 million.

Zhongji Holding, a company based in Shanghai that doesn't make video games, is buying DianDian Interactive, a subsidiary of FunPlus with about 120 employees developing and managing games like Family Farm, a game similar to FarmVille, as well as Family Farm Seaside, Royal Story and Happy Acres. Each of the games are similar, asking players to plant digital crops, manage buildings, and raise farm animals.

The acquisition, if approved by regulators, would represent one of the largest in recent years, much like Electronic Arts' purchase of PopCap games for about $1.3 billion in 2011. Its other recent large acquisition of Playfish, in 2009, was for a smaller $300 million. Zynga's largest acquisition occurred in January, when it agreed to pay $527 million in cash and stock for NaturalMotion. And, of course, there's Activision's merger with Vivendi Games in 2007, a deal valued at nearly $19 billion at the time.

But each of these companies was well known. PopCap was a star of the video game industry with its Bejeweled puzzle game, as well as its tongue-in-cheek Plants vs. Zombies strategy game. NaturalMotion, as well, created technology used in ground-breaking titles, such as Take-Two Interactive Software's Grand Theft Auto V crime drama.

FunPlus, by comparison, may be popular, but it's not one of the app store's top performers.

By the time the deal closes, however, FunPlus will have a cash hoard roughly that of Zynga's, which was about $1.15 billion at the end of June. Dan Fiden, chief strategy officer at FunPlus, says his company plans to continue making and creating new content for its games, including its latest, Barn Voyage.

The money, he said, "allows us to build out one of the biggest mobile game companies in the world."

Once the deal closes, Fiden said the FunPlus management team will continue to help steer the sold subsidiary for the next three years while Zhongji learns the business of making video games. Meanwhile, his team will also manage FunPlus, which will operate as a separate company making games.

Confused yet?

Fiden admitted the deal seems odd at first. The price also sounds high for a company that makes games like Family Farm Seaside, which recently ranked around 100 on Apple's list of highest grossing apps on the App Store, and around the 135th most downloaded free software, according to data compiled by App Annie.

"The price is reasonable relative to the growth and the size and, probably most importantly, the profitability of the business," Fiden said.

"The business we are talking about is not a photo sharing app that has no revenue and has lots of users and the potential to monetize those users," he added, indirectly referencing other large acquisitions, such as Facebook's 2012 purchase of Instagram, which had a $1 billion price tag.

FunPlus, by comparison, claims it has been able to grow revenue and profits rapidly, though the company didn't provide much data to that effect. And though its games aren't as popular as Supercell's Clash of Clans or King Digital's Candy Crush Saga, he said the four games put together represent a substantial business.

As for FunPlus, he said the deal is more indicative of interest among Chinese companies for games than Silicon Valley froth. "This is in line with other deals in China."