Vivendi bets on video games with Activision deal

LONDON (MarketWatch) -- The video-game giant forged by the tie-up of Vivendi's game unit with Activision Inc. will be home to best-selling titles "Guitar Hero" and "World of Warcraft" and could have enough scale to challenge current leader Electronics Arts Inc.Vivendi , whose activities span recorded music, pay TV and mobile telephony as well as games, on Sunday announced the $18.9 billion deal with computer-games pioneer Activision.
The French group will own a majority stake in the combined company -- to be called Activision Blizzard -- which will rival Electronic Arts.The deal will be carried out in two steps. First, Vivendi's game unit, Vivendi Games, will merge with Activision and Vivendi will purchase $1.7 billion worth of Activision shares for $27.50 each, giving it 52% of the new company.
Then, within five days of the deal closing, Activision Blizzard will do a $4 billion all-cash tender offer to buy up to 146.5 million of its own shares, raising Vivendi's stake to 68%. The deal will bring together some of the hottest franchises in the game sector. Activision publishes the "Guitar Hero" series -- one of this year's best-sellers -- as well as the popular "Tony Hawk" and "Call of Duty" series. Its business model is based on selling games for a one-time fee of $50 to $60.
Vivendi, meanwhile, is a big force in online and PC games played by people all over the world at the same time. The company owns Blizzard Entertainment, which publishes the popular "World of Warcraft" online multi-player game. Most "Warcraft" subscribers in Western markets pay $15 a month to play, while users in Asia typically buy cards that let them play the game for various time periods.
The overwhelming popularity of "Warcraft" is what led Activision to consider doing a deal with Vivendi, rather than trying to crack the multi-player market on its own.
"We didn't feel we could deliver an audience experience like they have done," Activision Chief Executive Bobby Kotick said in an interview. "As we began to talk, we realized we had these incredible synergies and a common belief on how the market would evolve."
Kotick will run the combined company as CEO, while Vivendi Games CEO Bruce Hack, will serve as vice chairman and chief corporate officer. Vivendi does deal as euro nears all-time high versus dollar
Once combined, Activision Blizzard will have annual sales of about $3.8 billion for the current fiscal year. Electronic Arts, by contrast, is expected to generate about $3.9 billion in revenue for the fiscal year ending in March, according to consensus estimates from Thomson Financial.
But analysts noted that Activision will now have a big lead in the market for online, multi-player games that are especially popular in the Asian markets, including China.
The big prize in the deal is indeed "Warcraft," which is by far the biggest game in the sector, with about 9.3 million subscribers globally. The game accounts for the bulk of the $1.1 billion in annual revenues generated by Vivendi Games.
"When you look at it, there are only about 15 million people worldwide playing online multi-player games, and more than half of them are Vivendi customers," said Michael Pachter, video game analyst with Wedbush Morgan.
Pachter called "Warcraft" a "phenomenon," against which EA will have a hard time competing.
"There's something about 'Warcraft' that is different from every other online game in that it is so much better then any others at getting customers into the game and getting them to stay there," Pachter said. "Activision is taking a big chunk of the market that EA was trying to get into."
Societe Generale analysts also welcomed the deal from the point of view of Vivendi, saying it will reduce its reliance on the "Warcraft" franchise.
It added that the transaction is struck at a time when the euro is near an all-time high against the dollar and still leaves Vivendi with some financial flexibility.
Santander analysts also stressed the benefits of the deal for Vivendi, saying Activision is a "good quality assets" with renowned licenses. It also noted that the games sector currently has stronger growth than the media sector, in which Vivendi operates, and said synergies between video games and telecom assets are possible.
"All in all, apart from a deal in the French telecom sector, we believe this merger is one of the best deals that Vivendi could have done," the broker concluded.
Dan Gallagher is MarketWatch's technology editor, based in San Francisco.Aude Lagorce is a senior correspondent for MarketWatch in London.

Activision Blizzard

December 2, 2007 - Until today, Sunday wasn't generally regarded as a big news day in this industry. But that changed this afternoon when Vivendi and Activision announced that they were joining forces to create the largest game publisher in the world. The new company, Activision Blizzard, will not only own some of the most prestigious brands in gaming (Warcraft, Call of Duty, Guitar Hero, Crash Bandicoot, and others) but will also have a tremendous PC/console diversity in their catalog and stronger penetration into Asian and online markets.To get a few more details on this deal and to find out just what it means for the Blizzard brand in particular, we recently spoke with Blizzard Entertainment's president and CEO Mike Morhaime.IGN: Thanks for joining us, Mike. I know you're busy today so we won't take up too much of your time. Tell us in general terms what this is all about.Mike Morhaime: Basically, Vivendi announced earlier today that it's going to be contributing Vivendi Games, which includes Blizzard, valued at 8.1 billion dollars plus 1.7 billion dollars in cash in exchange for 52% of Activision Blizzard, which will be the new company once Vivendi Games is injected into Activision.If you look at Activision and Vivendi Games, I'm sure you'll notice that they're very complimentary businesses. Activision has a firm track record on the console side of the business with very strong franchises like Guitar Hero, Call of Duty, and Tony Hawk. Blizzard Entertainment is number one on PC and online. We've got the number one MMORG in the world with over 9.3 million subscribers. We have great geographic penetration in North America and Europe and we're the only western publisher that has a significant penetration in to Asia. We have the number one brand in Korea, China and Taiwan. So when you combine these two companies together, what you get is the world's largest and most profitable video game publisher that is the leader across all platforms, all categories and all geographies.From a development standpoint, at Blizzard Entertainment one of our values of course is commitment to quality. Activision is structured with independent studios and they give their independent studios quite a bit of autonomy. They believe very strongly, like we do, that the way to run a successful business in this industry is through developing high quality games. That's the only way to develop long-term value in your franchises and your businesses. Ultimately the only way to win is to create great games. I think that the combination of these two companies provides us with a very diversified, stable structure with which we can reward talent and continue creating awesome games.IGN: We saw in the release that Vivendi could own as much as 68% of Activision Blizzard by the time the deal is over. Who actually is in charge and what's the management system like? Do you think the new management will preserve the independent approach to managing their developers?Mike Morhaime: When you say "managing their developers," the Blizzard Entertainment structure remains unchanged. I will remain president and CEO of Blizzard Entertainment reporting to Bobby Kotick who is CEO of Activision Blizzard. As far as development and publishing, Blizzard Entertainment will continue to be a publisher of computer games and will continue to be developing and maintaining our intellectual properties as we always have.IGN: Do you know if the new company is planning to publish titles under the Sierra or Vivendi brands?Mike Morhaime: That, I don't know. I think that there's going to be a lot of discussion about what the brand strategy will be going forward. On the Blizzard Entertainment side it's very clear that the branding strategy is what it's always been. The Blizzard Entertainment brand will remain unchanged.IGN: Do you anticipate that Activision Blizzard will gain access now to some of Vivendi's television and film properties that aren't a part of the deal?Mike Morhaime: I don't know about television or film but I do know that Doug Morris [Chairman and CEO of Universal Music Group] will have a seat on the Activision Blizzard board so there are potential opportunities with Universal Music for things like Guitar Hero.IGN: Are there any plans to cut divisions or staff that have been made redundant by the two companies coming together?Mike Morhaime: I think it's really too early to talk about stuff like that. I do know that's not our reason for doing the deal. We felt that the two businesses are very complimentary and I think there's going to have to be an evaluation of projects that are in development and there will be a green light process going forward. Projects that don't look like they're going to be profitable won't get green lit.IGN: The deal indicates that Vivendi as it currently stands is worth 8.1 billion dollars. What's the value of the new combined company?Mike Morhaime: We're estimating the value of the new company at 18.9 billion. The way we calculate that is 8.1 billion dollars plus 1.7 billion dollars in cash divided the stake that Vivendi will be receiving which is 52%.IGN: How long has this deal been in the works? Who approached whom?Mike Morhaime: There have been discussions going on for the better part of a year. Originally Bobby Kotick gave Bruce Hack, CEO of Vivendi Games, a phone call. They met for lunch to chat about potential things the two companies could do together. Very quickly, it became very clear to both of them that there was a potential opportunity to combine the businesses because they were so complimentary.Then Vivendi was brought in and met with the Activision guys and was very impressed. I've met several times with the Activision guys and we've talked at length about Blizzard's philosophy on game development and game publishing and all the things that are important to us at Blizzard. We found that we shared a lot of the same values. We feel pretty comfortable with the Activision executives and feel like they're going to continue being supportive of the way that Blizzard Entertainment runs their business. IGN: It sounds like there are plenty of advantages to the deal. Is there anything about being part of an even larger company that you feel you'll need to watch out for in the future?Mike Morhaime: There isn't really anything right now. I think the biggest change for us is more spotlights from financial press, which we really haven't had to deal with in the past because we've been really insulated from that in the past. One of my jobs as CEO of Blizzard Entertainment is to insulate the developers from that distraction so we can focus on making games like we always have.