A Good Time for This Game Giant to Be Set Free
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2008, Vivendi merged its video game business with Activision in a transaction valued at about $9.8 billion. The move gave Vivendi control over the combined entity. At the time, it allowed the newly merged companies to leapfrog Electronic Arts (NASDAQ: EA) to become the largest video game maker. Vivendi's move was a part of its efforts to bulk up its business in the media space.
Activision Blizzard has been a solid success story. The company has posted higher sales every year for the last decade, including through the deep 2007 to 2009 recession. And its earnings have continued to expand of late despite aging game consoles. EA, on the other hand, saw its top line grow up until the recession, and then it turned inconsistent at best. Revenue fell between fiscal 2012 and fiscal 2013. The bottom line, meanwhile, was mired in red ink over a four-year stretch that ended with a $0.23 a share profit in fiscal 2012.
Clearly, of the two, Activision has been performing better. That said, EA has been more aggressive in expanding into the casual market, buying PopCap and Playfish, and porting some of its “serious” gamer titles into the casual game space. That positions EA well on newer devices like tablets and smartphones. That should be a long-term positive for a company that's still turning its business around.
After the news of the buyout, Activision jumped higher, but its price to earnings ratio of about 14 is still over 30% below its five year average. So the shares are hardly expensive. Although the deal will add some $4.6 billion in debt to the balance sheet and eat up over a billion worth of cash, the company is still a good choice for growth investors.
That's particularly true since earnings across the video game space have been soft as gamers await new consoles from Microsoft and Sony. The PlayStation 4 and the Xbox One should be out in time for the holiday season. And with them will come a slew of new and updated games. That should turn sales at Activision and EA higher.
Already financially strong, Activision will be able to use improving results to pay down the debt it added to free itself. It might be less aggressive on the acquisition front for a couple of years, however, as it works to de-lever. That said, after the deal, debt will still only make up around a third of the capital structure, so it will have plenty of firepower if the right acquisition candidate comes along.
EA, meanwhile, will be happy to see sales head steadily higher as gamers upgrade to new consoles. It should provide the sustained boost that it needs to get back on the right track. More aggressive investors might like the turnaround potential that it offers, even though the shares have started to move higher in anticipation of the holiday season.
What about the former parent?
Vivendi, meanwhile, will get a nice cash infusion at a time when its business is in flux. The company's top line has been at a virtual standstill over the past three years and earnings have been anything but impressive. Analysts have suggested that the company lacks focus, with assets in the media and telecom spaces. Management had committed to shedding assets some time ago, but was yet to start the streamlining effort.
The Activision deal changes that. What comes next, however, is up in the air. There's a good chance that more assets will be sold. Vivendi's management has also suggested that the company could be split into two entities, with one focused around media and the other largely containing the company's telecom businesses. That's a lot of moving parts for a company that hasn't been performing particularly well.
That said, the Activision sale shows that Vivendi owns valuable assets. More aggressive investors looking for a special situation should probably take a look at the company. The Activision transaction could be the catalyst that leads to more shareholder-friendly moves and a higher share price.
Corporate actions can be tricky to digest. However, it looks like Activision is freeing itself at just the right time as a new game console cycle starts. That should be a huge benefit to shareholders. New versions of Xbox and PlayStation, though, will also help the recovering business of EA. Vivendi, meanwhile, is still an odd amalgam of a company. In that, however, could be hidden value if management keeps making shareholder-friendly moves.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. 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!