Risks and Leverage of a Possible Special Dividend at Activision Blizzard

In today’s call, Bhatia maintained his Buy raying and a $17 price target. He said:

In what will especially please the special-event style investors currently involved in Activision-Blizzard shares, there is renewed speculation Vivendi will force a $3 billion, or $2.70 per share, special dividend from Activision-Blizzard. We think management prefers the stock buyback route for its cash use but it may not have a choice given Vivendi’s controlling stake and new rights triggered on July 9.

It turns out that Vivendi owns 61% of Activision Blizzard, and it will discuss plans at its board meeting on Monday to extract a $3 billion (plus) special dividend from the Activision balance sheet. Sterne Agee thinks that this special dividend would come to approximately $2.70 per share, based on its 1.12 billion fully diluted shares outstanding.

Sterne Agee’s note points out that on July 9 Vivendi gained the right to force Activision to pay a special dividend without the need for permission from the non-Vivendi directors on the Activision board. This right was triggered after the expiration of a five-year period since the merger of Activision and Vivendi’s Blizzard division. In short, Vivendi could demand that special dividend even if Activision’s board would rather do a share buyback.

The other issue is that of Activision’s $4.3 billion held on its balance sheet, some $2.7 billion is held overseas, with only about $1.6 billion being held in the United States. Repatriating that cash would trigger expensive tax obligations in the United States. As such, Sterne Agee also believes that Activision likely will take on debt of at least $1.5 billion.

The firm thinks that this would be shareholder friendly, but we think it leverages up the balance sheet at a time when World of Warcraft is in need of a refresh, and when the next-generation gaming consoles are coming out. Wall Street appears to be concerned as we are because the stock is down 2.75% at $15.10. The 52-week trading range is $10.45 to $16.11, and the $17 Sterne Agee target price compares to a consensus price target of $17.31 according to Thomson Reuters.