Activision Publishing CEO Eric Hirshberg and Activision Blizzard CEO Bobby Kotick at this year’s E3.

JULY 26, 2013 • With €13.2 billion ($17.5 billion) in debt on its books Vivendi SA has been contemplating ways to pull money out of its 61% stake in publisher Activision Blizzard. In a huge $8.17 billion deal orchestrated by Activision Blizzard chief executive Bobby Kotick, the publisher will buy out Vivendi’s controlling stake. The agreement is structured around a 429 million share purchase by Activision Blizzard for $5.83 billion, and an additional 172 million share stake of $2.34 billion by an investment group led by Kotick and his co-chairman Brian Kelly that includes China’s Tencent Holdings plus Davis Advisors, and Leonard Green & Partners, L.P. Activision Blizzard will fund its part of the acquisition through the combination of $1.2 billion of domestic cash on hand and approximately $4.6 billion of debt proceeds, net of fees and upfront interest, accessed through the capital markets and bank financing. With rising debt Vivendi had been exploring a sale of Activision Blizzard for about a year with no success. Recently reports circulated that the company had decided to restructure itself as a scaled down media company where holding onto Activision Blizzard became more attractive. This week, however, the Wall Street Journal reported that Vivendi intended to force a $3 billion shareholder dividend out of Activision Blizzard’s $4.3 billion offshore cash deposits that would net Vivendi around $2 billion to pay off debt. Before that plan could take effect the deal with Kotick and Kelly was finalized. The Reuters News Service reported that Kotick has been exploring ways to take the publisher since soon after the 2007 merger that added Vivendi assets such as Blizzard Entertainment, yet left the French conglomerate with a controlling interest in Activision Blizzard. The final deal has been in negotiations for many months. Vivendi retains a 12% stake in the publisher.

Impact: Keeping Activision Blizzard would have made substantial sense for Vivendi if it were not saddled with crushing debt. Management of the games publisher has combined a hits-driven development strategy and a stable of successful franchises into a money-generating machine with net revenue of $1.05 billion for the quarter ending June 30.  But these are dire times for Vivendi. More slimming down measures are on the horizon – most notably a spinning off of its SFR telecom unit that includes the Universal Music Group, pay-TV business Canal Plus and Brazilian telecom GVT. Also in play is a €4.2 billion ($5.56 billion) sale of Morocco-based Maroc Telecom to Etisalat in Abu Dhabi. Vivendi chairman Jean-Rene Fourtou has said the conglomerate is in a “no taboo” era where anything is possible to end a persistent fall in share price, and releasing Activision Blizzard definitely falls into this category. The games publisher now trades a good portion of its cash reserves that would likely have been siphoned off had the deal not been culminated, plus takes on significant debt, to buy its freedom from the seriously listing Vivendi. The general early view from financial quarters is that the strength of the Call of Duty, Skylanders Giants, and Blizzard franchises can generate enough cash, and are long-lasting enough, to carry through the paying off of this debt in as little as five years.

Skylanders Giants character Shroomboom.

For Kotick and Kelly pulling out the buyout is likely to cement their reputations as the savviest financial executives in the game industry. Kotick is much despised among the game community but he is the one that built Activision from nothing to arguably the most powerful independent publisher. Activision investors have done very well over the years. Given Vivendi’s troubles Activision Blizzard was in real danger of being dismantled. Now it looks like the company has the chance to be more focused than ever in what will be a very challenging future.

What is unknown at this time is how control of Activision and Blizzard properties will be managed moving forward. Under Vivendi, the Activision Blizzard holding company did not publish games itself, leaving that role to the separate subsidiaries of Blizzard Entertainment and Activision Publishing. Whether Blizzard will retain this independence after the buyout has not been disclosed. Another factor to consider is that going independent allows Activision Blizzard the license to take more strategic risks than a more risk averse Vivendi may have sanctioned. This does not seem likely, however, as Activision’s publishing model was already built around bankable franchises before the 2007 merger. The publisher’s most glaring weakness remains – pushing the release of franchise sequels at such a pace that consumers grow fatigued. While Activision Blizzard has taken strong steps toward an online distribution future beyond World of Warcraft, it is fair to say much more needs to be done to catch up with current free-to-play trend. That’s why we find Tencent’s investment participation intriguing, in that such an association with China’s F2P powerhouse could help Activision Blizzard get further along in this business model.