Activision Blizzard Inc. (ATVI:US) and a group led by Chief Executive Officer Bobby Kotick agreed to buy most of Vivendi SA (VIV)’s stake in the company, the biggest U.S. video-game publisher, for $8.17 billion. The stock soared.
The maker of “Call of Duty” and “World of Warcraft” will take on debt to purchase shares held by Paris-based Vivendi for $13.60 each, or $5.83 billion. Kotick and partners including co-Chairman Brian Kelly, Chinese game maker Tencent Holdings Ltd. (700), Leonard Green & Partners, Davis Advisors and Fidelity Management & Research Co., will pay $2.34 billion, according to a statement yesterday and a company filing.
The accord ends five years of control over Activision by the French media and telecommunications company, and months of uncertainty for the Santa Monica, California-based video-game company as its departing parent sought ways to reduce debt. Activision and Kotick are buying out Vivendi at a 10 percent discount to yesterday’s closing price and said the terms would lead to faster profit growth this year.
“We tried to construct a transaction that rewarded our public shareholders and this structure accomplishes that,” Kotick said in a telephone interview. His group will own 25 percent of the company, according to the statement.
Activision jumped 15 percent, the most since October 2008, to reach an almost five-year high of $17.46 at the close in New York. The stock has risen 64 percent this year, giving the company a market value (ATVI:US) of $19.5 billion. Vivendi added 0.6 percent to 16.07 euros in Paris. Tencent climbed 3.9 percent to HK$347.40 in Hong Kong.
“This looks like a win, win, win for Activision, Vivendi and Activision shareholders,” said Colin Sebastian, an analyst at Robert Baird & Co. “It’s a better outcome than a special dividend to Vivendi, and I expect Activision will function even better as an independent company without the overhang of a struggling parent.”
Activision plans to fund the buyback with $1.2 billion in domestic cash and about $4.6 billion in debt, according to the statement. The company secured financing from Bank of America-Merrill Lynch and JPMorgan Chase & Co. Activision had $4.6 billion in cash and short-term investments as of March 31.
Because Kotick and the investment group are also buying stock from Vivendi, Activision will take on less debt, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Kotick and Kelly, who will be chairman, are contributing $50 million each, according to the statement.
“They generate about $1.1 billion in cash a year, so it’ll probably take them about four years to pay off the debt,” Pachter said.
The video-game maker said on Feb. 7 it may consider stock buybacks, dividends, acquisitions or other unusual transactions to return cash to shareholders. Vivendi had been seeking ways to extract cash, including discussions of a buyback or dividend.
Last year Vivendi canvassed possible buyers for its 61 percent Activision stake. Microsoft Corp. and Walt Disney Co. were among those that demurred, people with knowledge of the matter said at the time.
Kotick’s group and Vivendi weren’t able to strike a deal earlier this year because of differences over price, two people familiar with the matter said. With Activision above $15 the past two weeks, the parties struck a compromise that let Vivendi get cash and keep a minority stake, while Activision was able to buy the stock at a discount, said one of the people.
Activision Blizzard was the result of a 2008 merger after Vivendi agreed to contribute its $8.1 billion video-game business and pay $1.7 billion in cash in exchange for control of the entity it combined with Activision Inc. to surpass Electronic Arts Inc. (EA:US), the market leader at the time.
Kotick, 50, has led Activision since February 1991. The company has increased revenue every year since the 2008 transaction. Its $4.9 billion in 2012 sales compared with $3.8 billion for Electronic Arts’s most recent financial year, data compiled by Bloomberg show.
Vivendi’s board approved the stake sale at its quarterly meeting on July 22, according to a person familiar with the discussions who wasn’t authorized to speak publicly. The French company, which will be left with a 12 percent stake, gets cash to repay debt and prevent further rating cuts as Chairman Jean-Rene Fourtou pares assets to restore investor confidence.
Six Vivendi executives serving on Activision’s board of directors will resign their positions prior to the deal’s closing, Activision said in the filing.
Vivendi said today that it is considering a breakup that would restructure around media and content. The company has been re-evaluating its structure amid sluggish share performance and tough competition in its domestic mobile-phone market. Vivendi said this week it is in exclusive talks to sell its stake in Moroccan phone company Maroc Telecom SA to Emirates Telecommunications Corp. for 4.2 billion euros ($5.6 billion) to focus on media.
Kotick is engineering the change at Activision as the game industry, stuck in a two-year slide, begins the transition to a new generation of game consoles. Sales of titles for consoles have been hit hard.
In June, he warned of “uncertainties” as Sony Corp. prepares for the holiday-season introduction of the PlayStation 4 and Microsoft Corp. lays plans to sell the Xbox One at the same time.
While Activision’s three top-selling titles, “Call of Duty,” “Skylanders” and “World of Warcraft,” have set sales records with each iteration, competitors have set their sights on those titles.
Electronic Arts, the No. 2 video-game publisher, is prepping the fall release of the “Battlefield 4” shooter game to challenge “Call of Duty: Ghosts.” In August, Disney Interactive Studios will begin selling “Disney Infinity,” which combines video-game play with collectible figures, like “Skylanders.”
“World of Warcraft,” the most successful multiplayer online role-playing game, has lost more than 2 million players in just over a year, as it faces a challenge by Sony Online Entertainment.
With control firmly back in Kotick’s hands, Activision can purchase video-game companies overseas and invest more money to expand, Pachter said.
Goldman Sachs Group Inc. and Barclays Plc advised Vivendi, while JPMorgan Chase & Co. (JPM:US) was Activision’s adviser.
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