Activision (ATVI) Ads Vivendi Games, Creates Giant

The video game business just got a new leader. Activision (ATVI) will merge its operations with the game division of Vivendi.

According to the parties the newly named Activision Blizzard, is expected to have approximately $3.8 billion in pro forma combined calendar 2007 revenues and the highest operating margins of any major third-party video game publisher. Activision, one of the world’s leading independent publishers of interactive entertainment, is best known for its top- selling franchises, including Guitar Hero®, Call of Duty® and the Tony Hawk series, as well as Spider-Man™, X-Men™, Shrek®, James Bond™ and TRANSFORMERS™.

Under the terms of the agreement, Vivendi Games will be merged with a wholly owned subsidiary of Activision. In the merger, shares of Vivendi Games will be converted into 295.3 million new shares of Activision common stock. Based on the transaction price of $27.50 per share of Activision common stock, this implies a value of approximately $8.1 billion for Vivendi Games. Concurrently with the merger, Vivendi will purchase 62.9 million newly issued shares of Activision common stock at a price of $27.50 per share – a premium of 31% to Activision’s average closing price over the past 20 trading days – for a total of $1.7 billion in cash. As a result of these transactions, Vivendi will own an approximate 52% ownership stake in Activision Blizzard on a fully diluted basis.

This is far different from the merger we were expecting in the sector, and we’ll send out the new game plan to our Special Situation Investing Newsletter subscribers shortly.  Within five business days after closing the transaction, Activision Blizzard will launch a $4 billion all-cash tender offer to purchase up to 146.5 million Activision Blizzard common shares at $27.50 per share. The tender offer will be funded by Activision Blizzard’s cash on hand at closing, including the $1.7 billion in cash received from the Vivendi share purchase.

Douglas A. McIntyre