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Activision Blizzard (ATVI) Buys Its Freedom From Vivendi for $8.2 Billion

By: , dated August 2nd, 2013

Shares of video game publishing giant Activision Blizzard (ATVI) recently soared after it announced that it was buying back most of French communications and entertainment giant Vivendi’s stake in the company, which once accounted for 52% of voting shares. The move, which will cost $8.2 billion, would finally separate the gaming giant from its French parent company, which has been seeking to exit the business over the past few years.

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The deal has less to do with Activision’s lackluster stock performance over the past five years and more to do with the Vivendi’s own poor top and bottom line growth. Many large conglomerates, such as Time Warner (TWX) and News Corp. (NWS), have discovered that sometimes a bigger business is not necessarily better suited for long-term earnings and revenue growth.

Vivendi is slimming down and restructuring its businesses to reduce debt and streamline its businesses. In addition to Activision, Vivendi is shedding its majority stake in Maroc Telecom for $5.56 billion. However, the decision to sell Activision puzzled some analysts, since it is the company’s largest and most profitable media asset, despite its stagnant stock price.

Activision will acquire 85% of Vivendi’s stake in the company in two steps. First, Activision will directly buy back 429 million shares from Vivendi for $5.83 billion. An investor group led by CEO Bobby Kotick and co-chairman Brian Kelly will separately purchase an additional 172 million shares for $2.34 billion. Vivendi will retain a 12% stake in Activision Blizzard. To aid in the buyout, Vivendi is selling the shares at $13.60, a 10% to its previous day’s closing price.

Therefore, Activision’s big rally after the announcement wasn’t fueled by investor euphoria – rather it was due to the massive amount of shares being bought back. In the long term, Activision investors will still have to contend with rapidly declining subscribers at World of Warcraft, which lost 600,000 subscriptions last quarter. Many gamers and analysts also see a bleak future for Activision’s Call of Duty series, its other cash cow, as diminishing returns eventually catch up to the storied franchise. However, other titles such as the console version of Diablo III, its recently released Starcraft II expansion, Heart of the Swarm, could help sales perk up by the end of the year.

Breaking off Vivendi’s shackles could also gives Activision considerable freedom to forge new alliances, such as its new partnership with Chinese Internet giant Tencent, which owns the free-to-play hit title League of Legends. This alliance with Tencent could help the company quickly and effectively penetrate the Chinese PC gaming market, which has enjoyed robust growth due to the lack of game console penetration.

Shares of Activision Blizzard trade at 16.8 times forward earnings, with a 5-year PEG ratio of 2.52. This indicates that although the stock appears to be undervalued at current prices, with limited downside, its long-term upside potential also looks limited based on analyst projections. The stock pays a quarterly dividend of 1.2%.

Other News About ATVI
Activision, Investors to Buy Back Most of Vivendi’s Stake
Activision breaks free from Vivendi.
Activision Soars After Accord to Buy Out Vivendi Holding
What’s next for Activision?

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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