Game on for Vivendi, Activision


UPDATED 4:09 p.m. PT Dec. 2, 2007

In a move likely to redraw the video game landscape, Vivendi has agreed to pay $9.8 billion to merge its Vivendi Games unit with Activision Inc. and take a controlling stake in the new firm, which will be called Activision Blizzard.

The new gaming giant would house such hit franchises as "World of Warcraft" -- the world's biggest massively multiplayer online role-playing game with more than 9.3 million subscribers -- "Guitar Hero" and "Tony Hawk," and it will match or overtake market leader Electronic Arts in key performance measures.

For example, the deal values Activision Blizzard at $18.9 billion. EA's market capitalization as of Friday stood at $17.7 billion.

Similarly, the merger partners' combined 2007 calendar year revenue is expected to reach $3.8 billion. EA has projected revenue of $3.35 billion-$3.65 billion for its current fiscal year that ends March 31, or around $4 billion when excluding certain factors.

Activision Blizzard executives on Sunday also touted the new entity's position as the most profitable gaming company around and said they will look to leverage Vivendi's ownership of Universal Music Group.

They also emphasized that the companies will bring together Activision's console strength in the U.S. and Europe with Vivendi Games' solid position in PC games and in Asia.

Activision Blizzard will continue to spend time and money on the important game-development process, which has become increasingly expensive. But the new firm will be less reliant on Hollywood licenses than Activision currently is, as the merged company generates approximately 70% of its revenue from owned franchises, compared to around 50% at Activision, which has produced games tied to the "Transformers," "Spider-Man" and "Shrek" films, among others.

After the transaction, French entertainment and telecom conglomerate Vivendi will own 52% of the new entity. It is set to boost that to 68% under a planned share tender offer.

"This alliance is a major strategic step for Vivendi and is another illustration of our drive to extend our presence in the entertainment sector," said Jean-Bernard Levy, chairman of the management board and CEO of Vivendi. "By combining Vivendi's games business with Activision, we are creating a worldwide leader in a high-growth industry."

Activision chairman and CEO Robert Kotick lauded the deal as a benefit for his shareholders and "a pivotal event in the continuing transformation of the interactive entertainment industry." He called Activision Blizzard "the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry."

Wedbush Morgan Securities analyst Michael Pachter said the deal will change the look of the gaming sector. "We have two really big independent publishers out there now instead of one," he explained. "EA has to get serious about massively multiplayer online games as Activision Blizzard will now have the resources to compete."

Kotick will serve as president and CEO. Rene Penisson, currently a member of the management board of Vivendi and chairman of Vivendi Games, will be chairman of Activision Blizzard. Brian Kelly, currently co-chairman of Activision, will serve as co-chairman of the new firm, with Vivendi Games' Bruce Hack taking the role of vice chairman and chief corporate officer.

Activision Blizzard's board will have 11 directors, six of who will be designated by Vivendi. Among them are Levy and UMG chairman and CEO Doug Morris.

The deal will immediately boost Activision's earnings in the first year after closing and will be "slightly accretive" for Vivendi, the companies said.

Kotick said the firm this year should report about twice the operating profit of EA. Activision Blizzard also projects pro forma operating income of $1.1 billion and pro forma earnings per share of more than $1.20 in 2009.

Within five business days after the merger is completed, Activision Blizzard will launch a $4 billion all-cash tender offer to purchase up to 146.5 million of its own shares at $27.50 each. Vivendi will also buy up to $700 million in shares.

The merged company will continue to operate as a public company traded on NASDAQ under ticker symbol "ATVI."

In a telephone interview, Kotick and Levy said they are bullish on the merged company's outlook.

Kotick touted that gaming is one of the fastest-growing sectors in entertainment and that the combined firm will "take advantage of the changing composition of our audiences with 'Guitar Hero' and 'World of Warcraft.' "

He also said that the new online gaming capabilities of the company should benefit Hollywood partners, even though he didn't immediately provide specifics.

He added that Activision Blizzard is committed to the necessary development spending in today's competitive gaming market.

Levy said that the deal allows Vivendi to finally highlight the true value of his gaming assets, which are currently hidden within the larger conglomerate. "I am extremely committed to gaming," he said, lauding Activision Blizzard's growth, profitability and leadership positions.

Kotick told The Hollywood Reporter that the two sides first started talking about a possible deal a year ago, followed by a visit Vivendi executives paid earlier this year to Activision's Santa Monica headquarters. He said both sides felt there was "great chemistry" early on.