The Key Benefits to Activision Blizzard's Independence
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A year ago, I laid out the case for how 2013 would be the "Year of the Activision Breakout," and predicted that the company's shares would rise from $11 per share to around $18 by the end of this year. After strong financial results and the recent announcement of a deal to buy back most of Vivendi's (NASDAQOTH: VIVHY.PK) majority stake in the company, Activision Blizzard's (NASDAQ: ATVI) share price has surged to an all-time high above $18 per share and has doubled the performance of the S&P 500.
This article will take a detailed look at what this deal means for Activision going forward.
To regain Activision's independence, CEO Bobby Kotick struck a deal that benefits both the company and Vivendi. Vivendi, which is in need of liquidity as a result of struggling business units, will sell most of its stake in Activision for $8.2 billion and will retain ownership of just 83 million shares (12% of the company) after the transaction. The $8.2 billion cash infusion to Vivendi is coming from Activision purchasing 429 million shares from its former parent company for $5.8 billion, and an investor group led by Kotick himself buying an additional 172 million shares for $2.3 billion.
From a balance sheet perspective, this deal makes a lot of sense for everyone involved. Vivendi gets a sizable cash payout, while Activision will use a combination of its hefty net cash balance ($4.6 billion at the end of Q2 2013) and the issuance of a manageable amount of debt (expected to equal $4.6 billion) issued at historically low interest rates. Following the transaction, Activision expects to maintain a cash balance of approximately $3 billion. The effect of adding leverage to reduce the outstanding shares has a powerful impact on EPS; management expects EPS accretion of around 30% following the transactions.
Another interesting point worth noting is that Kotick and his investment group will own approximately 25% of Activision after closing of the transaction. For investors that focus on the various ways for management's interests to be aligned with shareholders, there are few methods that more effectively achieve this then the sizable ownership stake that will be acquired by Kotick, co-chairman Brian Kelly, and their investment group.
A time of transition
Now that the stock has surged following news of the transaction, the remainder of 2013 will likely be highlighted by a period of transition for Activision, as noted in the company's conference call to discuss its second quarter earnings. Here are a few notable examples:
- Console Refresh - With Nintendo's Wii U off to a slow start, Activision and others in the industry are hoping for a much stronger response to the next-generation Playstation 4 and XBox One. The next installments of Call of Duty and Skylanders and the highly-anticipated (and already award winning!) franchise Destiny are expected to do big things for the company; the ultimate success of these top-selling pre-order titles will be highly correlated to sales of the new consoles.
- World of Warcraft - In the most recent quarter, the steady decline in WoW subscriptions has continued. With that said, there are still 7.7 million subscribers to the franchise, making it the most successful MMORPG in the world years after its initial release.
- Titan Reset - Blizzard's next MMO title, codenamed "Titan," was widely expected to be released in the next year. In May, it was announced that the project was reset and that a timetable for release is not available. While not uncommon for games developed by Blizzard, this news has many speculating that the game will not be available until 2016, and that perhaps the subscription-based model will be scrapped in favor of the more transactional model favored by many recent MMO releases.
In combination, these developments create some questions regarding the company's short term ability to drive growth. Management confirmed this through a cautious outlook for the remainder of the year. However, over the long term the quality of Activision's games remains unquestioned.
New strategic options
With Activision's independence from Vivendi comes the opportunity for Kotick to have more freedom to make strategic transactions. This is particularly important as it relates to potential acquisitions. One potential target that has already been speculated in the media is Take-Two Interactive (NASDAQ: TTWO). Take-Two has a solid lineup of games, including the 2K Sports games, Grand Theft Auto, and more, but has not exhibited the ability to remain consistently profitable, which has become a hallmark for Activision. With a market capitalization of around $1.7 billion, Take-Two would be a target that Activision can afford to acquire with cash on hand following its buyback and not require any additional debt.
Take-Two is just one of many potential acquisition targets for Activision now that the company has free reign to make decisions without the heavy influence of Vivendi.
Activision remains a "Top 10 Stock"
Activision is a part of my "top 10 stock" series of investment ideas for the long term. With Call of Duty and Skylanders holding onto the top two spots on the best selling games list and World of Warcraft continuing to lead MMORPGs, the original investment thesis in Activision remains strong. Even after the surge in share price in recent weeks, the benefits of Activision's buyback deal with Vivendi continue to make the company a compelling investment option. With earnings accretion expected to reach 30%, combined with the benefits of being able to operate the company independently, the current valuation seems quite reasonable.
However, given the recent run up in share price and lack of short-term catalysts, I won't be making any bold predictions of 50%+ returns for the next year. It is more likely that we will see modest gains in the near term as the company positions itself for a strong 2014.
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Brian Shaw owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!