Eidos issues warning, risks breaching bank covenants

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The announcement issued this morning by Eidos warning of lower revenues as a result of disappointing sales of Tomb Raider Underworld makes stark reading for investors. The shares had fallen by 26% by lunchtime today to 12.75p, down 95% over the past two years.

Full year revenue is now estimated to be £160-180 million, down from previous guidance of £180-£200 million.

The most worrying statement in the release is: “We have passed our peak net debt position and we retain sufficient headroom within our committed banking facility but given revised profit expectations we may need to enter into discussions with our lending bank regarding our June 2009 covenants.”

In 2008, Eidos raised £60 million (before expenses) in new equity and arranged a debt facility of £25 million with Lloyds TSB to “cover short-term working capital needs in periods where there are a number of product launches.” This overdraft facility is usually at zero at Eidos’s financial year end, but is drawn down throughout the financial year to pay for the substantial working capital requirements of marketing and distributing several major games at once. It is particularly key for the Christmas period.

If Eidos is in breach of its covenants, it will need to re-negotiate its facility with Lloyds TSB by the middle of this year, against a background where banks are desperate to reduce their credit exposures to just about everybody. The practical impact of this will be to limit Eidos’s working capital as it tries to push out new titles later this year.

With Tomb Raider disappointing, there is little in Eidos’s warchest. There is as yet no confirmed release date for the next iteration of Hitman and other franchises are not of the same scale as Lara Croft.

So we have a profit warning, share price collapse and risk that Eidos’s working capital facility will be removed. At this point, Eidos watchers usually start shouting that a takeover is imminent – with Warner as the prime (perhaps only?) suspect. It remains possible, as I’ve mentioned before (See Eidos/Warner Update) but I fear that Eidos may yet have further to fall.

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