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.