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In the space of less than three months, Activision Blizzard (NASDAQ: ATVI) announced and completed a complicated stock buyback that negated the bulk of Vivendi’s former majority stake and returned control of the company to its U.S.-based management team. Although a surprise lawsuit had threatened to scuttle or hold up the deal, it had been viewed favorably by the majority of the company’s shareholders. Thanks to ongoing internal struggles to shore up the French firm’s bloated business portfolio and sagging share price, Vivendi’s management team had pushed hard for the transaction’
The two-pronged buyback was officially completed on October 13, 2013. At a total cost of more than $8 billion, Activision’s management team joined with a consortium of company insiders and outside investment groups to repurchase about 600 million of the company’s shares at a per-share cost of $13.60. Now that the deal has been completed, there are fewer than 700 million outstanding shares of Activision Blizzard on the market. Retail investors and institutional investors control the bulk of these shares, but Vivendi retains control of a 12 percent stake. This report will briefly outline the history of the deal and provide information for investors who wish to position themselves for future moves in the stock prices of Activision and Vivendi.
A Brief History of Activision
Santa Monica, California-based Activision Blizzard is one of the world’s leading developers of video games for consoles and PCs. The company is known for developing popular first-person shooter games as well as role-playing, team-building and educational titles. It earns a significant amount of its revenues through subscriptions to “massive online multiplayer games” that draw devoted fan followings. The firm’s revenues have increased markedly in recent years and now approach $5 billion per year. In 2012, Activision had an EBITDA of nearly $2 billion.
Timeline of the Buyback
In late July of 2013, Activision announced that it would initiate a two-pronged buyback of Vivendi’s 62 percent stake in the company. According to its initial plan, the firm would use about $5.8 billion in cash and debt to repurchase around 430 million shares from Vivendi. In order to avoid taking on an unsustainable amount of debt, the firm turned to executives Brian Kelly and Bobby Kotick to come up with an additional $2.3 billion for a separate buyback of 170 million shares at the same price point of $13.60. Both executives contributed $50 million of their own cash to the deal and secured the remaining funds from a variety of institutional and individual sources.
In early September of 2013, a disgruntled Activision investor petitioned a Delaware judge to halt the pending buyback in lieu of a shareholder vote. Many observers were shocked when the judge sided with the individual and ordered an injunction against the deal. Activision and Vivendi scrambled to limit the damage and called an “emergency”
What Happened with the Lawsuit?
As it turned out, a vote was not necessary. On October 10, the New York Times reported that the Delaware Supreme Court had reversed the injunction and allowed the deal to proceed. Since the lawsuit-generated hold was the only matter that prevented the deal from closing during September, Vivendi and Activision quickly consummated the transaction. As of October 13, Activision Blizzard is no longer a subsidiary of the French conglomerate. Market-watchers widely regard this situation as a win-win for investors in both firms.
What Will Vivendi Do Next?
Vivendi’s management team is relieved to be rid of its massive investment in a non-core business. In recent years, the firm has moved to minimize the delayed effects of the massive media-buying spree on which it embarked in the late 1990s. The firm still has a long way to go, but the Activision divestment counts as a big first step. According to a recent report, the company plans to use the windfall from this transaction to buy back nearly $3 billion in debt over the course of the next year. This will shore up its U.S. balance sheet and help it boost its long-term profitability.
How Can Investors Position Themselves?
A number of factors conspire to make Activision an attractive buy at its current levels. For starters, the firm is now free to engineer its own destiny. Vivendi was not necessarily a bad majority-owner, but the persistent threat of a “Parisian veto” certainly hampered the decision-making processes of Activision’s management team. Additionally, Activision’s shares have dropped significantly since the consummation of the buyback. With an impressive pipeline, this pullback looks likely to prove temporary. Investors who buy in at these levels could reap handsome rewards over the medium and long terms.