Vivendi to Buy Activision Stake, Forming Game Venture
By Jennifer Sondag
Dec. 2 (Bloomberg) -- Vivendi SA agreed to buy a controlling stake in Activision Inc. for $9.8 billion to create the world's largest maker of video games.
Vivendi will contribute its $8.1 billion video-game business and pay $1.7 billion in cash for a 52 percent stake in the combined company, Vivendi and Activision said in a statement today. The new company will make an offer to buy back as much as $4 billion in shares at $27.50 each, or 24 percent more than Activision's closing price on Nov 30.
The merged company, called Activision Blizzard, will bring together Vivendi's top-selling online game ``World of Warcraft'' with the ``Guitar Hero'' and ``Call of Duty'' franchises owned by Santa Monica, California-based Activision. The venture will have about $3.8 billion in sales this year on a pro-forma basis, the companies said, surpassing market leader Electronic Arts Inc.
``There is a competitor now to Electronic Arts,'' said Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles. ``There is no more clear No. 1 and clear No. 2 company. There are now two guys that are dominant.'' He rates Activision ``strong buy'' and doesn't own the shares.
The new company will trade on the Nasdaq Stock Market under Activision's ATVI symbol. Activision rose 18 cents to $22.15 on the Nasdaq Nov. 30. Paris-based Vivendi advanced 49 cents to 31.39 euros, giving the company a market value of 36.5 billion euros ($53.7 billion).
Higher Earnings
The venture will add to earnings per share in its first year after the transaction closes, the companies said. Activision Blizzard targets operating income of $1.1 billion and earnings of $1.20 a share for 2009.
Activision Chief Executive Officer Robert Kotick will stay in his role at Activision Blizzard. Bruce Hack, CEO of Vivendi Games, will become vice chairman and lead the merger integration.
``We are demonstrating a commitment to the games business,'' Vivendi Chief Executive Officer Jean-Bernard Levy said in an interview.
Kotick said in an interview that he approached Hack about a year ago to discuss a deal. After the two had lunch together, Levy traveled to Santa Monica.
``Both of our businesses strengthened as we got through the year,'' Kotick said. He said he started the talks because Activision considered Vivendi's online gaming unit and its growth in Asia ``impossible to duplicate.''
Raising Forecasts
On Nov. 27, Activision raised its profit and sales forecasts for this quarter on demand for its latest ``Guitar Hero'' game. ``Guitar Hero III: Legends of Rock,'' released in October, was last month's best-selling title for Nintendo Co.'s Wii and Sony Corp.'s PlayStation 2 and PlayStation 3 consoles, according to research firm NPD Group Inc., based in Port Washington, New York.
The games unit is Vivendi's fastest-growing business, and the smallest by revenue. Earnings before interest, taxes and amortization jumped 71 percent in the third quarter to 41 million euros. Games accounted for 4.5 percent of Vivendi's sales in the first nine months of the year.
The global video-game industry will grow an average of 9.1 percent annually to reach $48.9 billion in 2011, trade publication Hollywood Reporter said in June, citing a report by PricewaterhouseCoopers. That's faster than the 6.4 percent growth rate for the overall entertainment industry, the report said.
New Shares
Vivendi will receive 295.3 million new shares of the combined company in return for its games business, and will pay $1.7 billion in cash, or $27.50 a share for another 62.9 million shares. The deal values Vivendi's games business at about $8.1 billion based on the per-share price. On that basis, the combined company would be valued at $18.9 billion, Activision and Vivendi said.
Activision Blizzard will use cash on hand, including the $1.7 billion from Vivendi, to pay for shares in the tender offer, the companies said. Vivendi can buy as much as $700 million in additional stock, the proceeds of which also would be used for the buyback. Activision Blizzard will borrow any remaining cash needed for the buyback from Vivendi or lenders.
If shareholders tender the $4 billion in shares, Vivendi's stake in Activision Blizzard will increase to 68 percent.
Kotick said there will be savings from integrating the companies' sales teams and corporate functions. He said employment overall will increase after five years.
Largest Business
SFR, France's second-biggest provider of mobile-phone services, is Vivendi's largest business. It accounted for 42 percent of revenue in the first nine months. The company's other operations include Universal Music Group, the world's biggest music company, and pay-television company Canal Plus.
This month, Vivendi reported its first drop in profit in seven quarters because of sliding sales of compact discs and the dollar's decline against the euro. Third-quarter profit excluding one-time gains and some costs fell 1.4 percent to 721 million euros.
Pachter said it made sense for Vivendi to combine with Activision rather than Electronic Arts because Vivendi wouldn't have been able to buy control of EA for the same price.
Electronic Arts, the maker of the ``Madden NFL 08'' and ``NFL Football 08'' games, last month reported a second-quarter loss on costs to make and advertise the football games. The company is spending more to attract buyers to games made for new consoles, including Xbox 360 and Wii. Electronic Arts has a market value of $17.7 billion.
Risen This Year
Activision has risen 28 percent this year in Nasdaq trading, beating the 9.8 percent increase in a Standard & Poor's index of entertainment software stocks. The company had a market value of $6.5 billion as of Nov. 30.
Vivendi has gained 6 percent for the year, outpacing the 9 percent drop in the Bloomberg Europe Media Index and the 2.3 percent gain in France's benchmark CAC 40 Index.
Allen & Co. LLC advised Activision on the transaction, and Goldman, Sachs & Co. advised Vivendi. Activision also used Skadden, Arps, Slate, Meagher & Flom LLP as its legal counsel, while Gibson, Dunn & Crutcher LLP acted as counsel to Vivendi.
Vivendi and Activision plan to complete the deal in the first half of next year.
Vivendi owns 20 percent of NBC Universal Inc., the parent of the NBC television network in the U.S. General Electric Co. owns the rest.
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