Activision CEO leads $8.2 billion investor buyout
Bobby Kotick, chief executive of Activision Blizzard, is leading an $8.2 billion investor buyout of most of Vivendi's controlling stake in the world's largest video games company.
The group behind Call of Duty and World of Warcraft will use about $1.2 billion in cash and roughly $4.6 billion of debt to buy 429 million shares from Vivendi, the French entertainment and telecoms company which holds a 61 percent stake in Activision.
It will buy the shares for $5.83 billion, or $13.60 per share. An investor group led by Mr Kotick and Activision's co-chairman, Brian Kelly, will buy a further 172 million shares at the same price for about $2.34 billion in cash.
The two deals – priced at a 10 percent discount to Activision's $15.18 closing price on Thursday – will leave Vivendi with 83 million shares, or about a 12 percent stake.
Mr Kotick, Mr Kelly and other investors that include Davis Advisors, Leonard Green & Partners and Tencent, Activision's partner in China, will hold about 24.9 percent. Mr Kotick and Mr Kelly will invest a combined $100 million.
The transactions will allow Vivendi to reap substantial tax benefits. They will also reduce debt at a time when the company is undertaking a sweeping restructuring, under pressure from investors who want its board to simplify the group.
Activision said it would also acquire "certain tax attributes" from Vivendi, such as the ability to use past losses to reduce taxes on future profits. It predicted that the deal would boost pro forma earnings per share this year by 18-29 percent on a GAAP basis and by 23-33 percent on the non-GAAP basis the company uses for its internal planning.
In a statement, Mr Kotick said the deals represented "a tremendous opportunity for Activision Blizzard and all its shareholders, including Vivendi".
He added that Activision, maker of the Diablo and Skylanders franchises, would become "an independent company with a best-in-class franchise portfolio and the focus and flexibility to drive long-term shareholder value and expand our leadership position as one of the world's most important entertainment companies".
(Read more: Activision earnings and revenue top forecast)
The transaction was agreed at a board meeting in California on Thursday at which the company was represented by a committee of independent directors.
Activision said it had committed financing from Bank of America Merrill Lynch and JPMorgan, and expected the deal to close by the end of September. It will emerge with about $1.4 billion of net debt.
The agreement came soon after Vivendi gained new powers to force Activision to take on debt and pay out a sizeable dividend.
Standard & Poor's had not taken into account Activision's cash in its triple B rating of Vivendi, so the cash from selling most of its stake could boost the French group's credit rating.
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Vivendi is in exclusive negotiations with Etisalat of Abu Dhabi to sell its Maroc Telecom subsidiary for €4.2 billion. It has tried to sell GVT, its Brazilian telecoms business, and examined options including a spin-off for SFR, France's second largest mobile operator, as it seeks instead to focus on its entertainment assets.
The most prominent of these now are Universal Music, the world's largest music company, and Canal, the French pay-television business. Last week, it emerged that Vivendi had turned down an $8.5 billion approach for Universal from SoftBank of Japan.
The possibility of Mr Kotick leading a buyout of Activision was rumored last summer, but Activision's scale has long been seen as a bar to taking it private. Instead, the group will remain publicly quoted but without a controlling shareholder which had that prevented some funds from investing in it.
(Read more: Vivendi spurns $8.5 billion Universal Music bid)
Mr Kotick became chief executive officer of Activision in 1991. In 2008, he oversaw the combination of its portfolio of titles for consoles and handheld devices with Blizzard, the Vivendi-owned games business with strengths in PC and online subscription games.
On Thursday, Mr Kotick said that since then, "we have generated over $5.4 billion in operating cash flow and returned more than $4 billion of that to shareholders via buybacks and dividends".
The video games industry is preparing for the introduction this year of new Xbox and PlayStation consoles from Microsoft and Sony that some analysts expect will be the last generation of games consoles. Console games accounted for 43 percent of Activision's sales last year.
In May, Mr Kotick cautioned that "the risks and uncertainties" in the latter half of this year looked "more challenging" than Activision previously thought. He said declines in World of Warcraft subscriber numbers also raised concerns.
(Read more: China video game market poses risks: Activision CEO)
On Thursday, Activision said World of Warcraft had 7.7 million subscribers, compared to 8.3 million at the end of March and 9.6 million at the end of last year.
However, the company raised its full-year GAAP revenue outlook from $4.22 billion to $4.31 billion. It said earnings per diluted share would be 77 cents, rather than its previous guidance of 73 cents. Activision reported revenues of $4.86 billion for 2012, with net income of $1.15 billion.
Activision shares closed down 21 cents at $15.18 on Thursday, valuing its equity at about $17 billion. The stock is up 43 percent this year, but it has underperformed some competitors. Vivendi's shares are down almost 6 percent since the start of the year.
Activision was advised by JPMorgan and Skadden, Arps. The independent directors were advised by Centerview Partners and Wachtell, Lipton. Mr Kotick's investor group was advised by Allen & Company and Sullivan & Cromwell.