March 12 (Reuters) - Niantic Labs said it would sell its

video-game division to Saudi Arabia-owned Scopely for $3.5

billion, as the U.S. augmented reality firm shifts focus to

geospatial technology after failing to recreate the success of

its 2016 smash hit "Pokemon Go."

The deal, announced on Wednesday, also advances Saudi

Arabia's ambitions to become the "ultimate global hub" for

gaming. The kingdom's sovereign wealth fund, via Savvy Games,

bought Scopely for $4.9 billion in 2023 as part of a broader

push by the country to diversify beyond fossil fuels.

Niantic said it would distribute an extra $350 million to

its equity holders under the deal. It will also spin off its

geospatial AI business into a new firm called Niantic Spatial,

which will be led by Niantic founder and CEO John Hanke.

Niantic Spatial will be funded with $250 million of capital

- $200 million from Niantic's balance sheet and $50 million from

Scopely. All of Niantic's original investors will also continue

to be shareholders of Niantic Spatial.

The move follows several tough years for Niantic. After

"Pokemon Go" became one of the successful mobile games, the

company struggled to replicate its success and had to lay off

employees in 2022 and 2023. It also axed the "Harry Potter:

Wizards Unite" vide-game in 2022.

For Saudi, already a growing hub for gaming and home to the

Esports World Cup, the deal builds on a plan to invest nearly

$38 billion in initiatives related to the industry through its

Savvy Games Group.

Savvy Games is a major investor in global video-game

companies including Nintendo ( NTDOF ), in which it has a stake

of around 7.54% after a small cut in its interest last year.