Zynga Inc, developer of popular Facebook games such as FarmVille and Mafia Wars, could be the best proxy for investing in Facebook until the world's largest social network goes public itself.

Zynga filed with regulators on Friday for an initial public offering of up to $1 billion, emphasizing that its relationship with Facebook will play a major role in its future success.

That tight pairing is a double-edged sword. On the one hand, Zynga gets access to Facebook's more than 500 million members, and Zynga keeps people returning to Facebook.

On the other hand, Zynga warned in the risk factors section of its IPO filing that it relies on Facebook for nearly all of its revenue and players. Any deterioration in our relationship with Facebook would harm our business, Zynga said.

Zynga is the top game publisher on the world's No.1 social networking site. While its games are free, revenue comes mainly from selling virtual items such as tractors and weapons that people use in the games.

Last year, the online game company came close to declaring war over a change in Facebook's policy involving credits -- the currency Zynga players use to buy virtual goods. Facebook wanted to take a 30 percent cut of transactions.

Bing Gordon, a video game veteran, Zynga board member and partner at Kleiner Perkins Caufield & Byers, described the standoff during the TechCrunch Disrupt conference in May as a Silicon Valley version of the Cuban Missile crisis where Zynga was at one point prepared to walk away from Facebook.

Facebook would love to lessen its dependence on Zynga, but it's not going to shoot Zynga, said Michael Pachter, an analyst with Wedbush Securities. Zynga is reason to come back to Facebook every day.

So far, Facebook's 30 percent cut from virtual goods sold on its platform does not yet seem to have hurt Zynga.

At 232 million monthly actively users and (revenue of) $235 million, that is $1 per monthly active user per quarter, which is impressive, said Pachter.

In the three months ended March 31, Zynga's common stockholders broke even on revenue of $235.4 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $112.3 million, up 20 percent from the same quarter a year earlier, according to the prospectus.

SOLID BUSINESS, HIGH PRICE

A source previously told Reuters that Zynga's IPO could raise $1.5 billion to $2 billion, and value the company at $15 billion to $20 billion. The $1 billion figure Zynga gave in its filing is for calculating registration fees, and the final size of the IPO could be different.

The filing comes just ahead of the annual Sun Valley conference next week, where Zynga founder and Chief Executive Mark Pincus is expected to rub elbows with media moguls, Internet entrepreneurs and investors.

Zynga offers investors an alternative to traditional video game companies, whose share prices have eroded in recent years. Zynga's games, which do not require hardware, have been eating into the $60.4 billion video game industry, consisting largely of action or sports games played on consoles and TV sets.

Consider gaming stalwarts Electronic Arts and Activision Blizzard Inc. Sterne Agee analyst Arvind Bhatia estimates that EA is trading 11 times its enterprise value to EBITDA in the past four quarters, while Activision is trading at 6 times. Zynga would trade at 34 times based on a $15 billion valuation.

Zynga did not say how many shares it was planning to sell or give an expected price range in its U.S. government filing.

Out of all the Internet and social media IPOs we've seen so far, Zynga is one of the more solid ones, said Paul Verna, a senior analyst at eMarketer.

LinkedIn hasn't produced significant profits so far, Pandora is unprofitable and Twitter hasn't come close to generating significant revenue. Zynga has a lot to show for it.

Morgan Stanley, Goldman Sachs, Bank of America Merrill Lynch, Barclays Capital, JPMorgan and Allen & Co are underwriting the IPO.

(Reporting by Clare Baldwin, Jennifer Saba in New York;Liana B. Baker in Montreal and Alistair Barr in San Francisco;

Editing by Lisa Von Ahn, Gunna Dickson, Robert MacMillan and Bernard Orr)

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