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Activision Becomes Independent With Buyout of Vivendi

Alex Beckers watches a presentation on the video game "Destiny" at the Activision Blizzard Booth during the Electronic Entertainment Expo in Los Angeles.

Alex Beckers watches a presentation on the video game “Destiny” at the Activision Blizzard Booth during the Electronic Entertainment Expo in Los Angeles.

Activision Blizzard Inc. (ATVI) and a group led by Chief Executive Officer Bobby Kotick agreed to buy out most of Vivendi SA (VIV)’s stake in the biggest U.S. video-game publisher for $8.17 billion, ending five years of control by the French media and telecommunications company.

The maker of “Call of Duty” and “World of Warcraft” will take on debt to purchase shares held by Paris-based Vivendi for $13.60 each, or $5.83 billion in total. Kotick and his partners, who include co-Chairman Brian Kelly, Chinese video-game publisher Tencent Holdings Ltd. (700), Davis Advisors and Leonard Green & Partners, will pay $2.34 billion.

The transactions, at a 10 percent discount to yesterday’s closing price, end months of uncertainty for Santa Monica, California-based Activision by making it an independent company again. Vivendi, which will be left with a 12 percent stake, gets cash to repay debt and prevent further rating cuts as Chairman Jean-Rene Fourtou pares assets to restore investor confidence.

“We tried to construct a transaction that rewarded our public shareholders and this structure accomplishes that,” Kotick said in a telephone interview.

Activision said on Feb. 7 that it may consider stock buybacks, dividends, acquisitions or other unusual transactions to return cash to shareholders. Vivendi has been seeking ways to extract cash, including discussions of a buyback or dividend.

Debt Financing

Vivendi rose as much as 5.8 percent and traded 2.6 percent higher at 16.39 euros as of 12:45 p.m. in Paris. Tencent climbed 3.9 percent to HK$347.40 in Hong Kong. Activision fell 1.4 percent to $15.18 in New York yesterday before the announcement. The stock has advanced 43 percent this year, giving the company a market value of $17 billion.

Last year Vivendi canvassed possible buyers for its 61 percent Activision stake. Microsoft Corp. and Walt Disney Co. were among those that have demurred, people with knowledge of the matter said at the time.

Kotick’s group and Vivendi weren’t able to strike an deal earlier this year because of differences in price, two people familiar with the matter said. With Activision shares trading above $15 the past two weeks, a compromise was possible that allowed Vivendi to get cash and still retain a minority stake, while Activision was able to buy out the stock at a discount, said one of the people.

Electronic Arts

Activision Blizzard was the result of a 2008 merger after Vivendi agreed to contribute its $8.1 billion video-game business and pay $1.7 billion in cash in exchange for control of the entity it combined with Activision Inc. to surpass Electronic Arts Inc. (EA), the market leader at the time.

Activision has increased revenue every year since the transaction. Its $4.9 billion in 2012 sales compared with $3.8 billion for Electronic Arts’s most recent financial year, data compiled by Bloomberg showed.

Vivendi is re-evaluating its structure amid sluggish share performance and tough competition in the French mobile-phone market. The company said this week it is in exclusive talks to sell its stake in Moroccan phone company Maroc Telecom SA to Emirates Telecommunications Corp. for 4.2 billion euros ($5.6 billion) to focus on media.

Activision plans to fund the buyback with $1.2 billion in cash and about $4.6 billion in debt financing, according to the statement. The company secured financing from Bank of America-Merrill Lynch and JPMorgan Chase & Co. (JPM)

Tender Avoided

The deal avoids a tender offer to purchase all outstanding shares, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. By adding the investment group, in which Kotick and Kelly contributed $50 million each, Activision also will take on less net debt, Pachter said.

“It’s pretty neutral to shareholders the way it was worked,” Pachter said. “They generate about $1.1 billion in cash a year, so it’ll probably take them about four years to pay off the debt.”

After reducing the outstanding share count, the company will take on $1.4 billion of net debt, according to the statement, accretive to 2013 earnings of between 18 percent and 29 percent on a GAAP basis.

“This looks like a win, win, win for Activision, Vivendi and Activision shareholders,” said Colin Sebastian, an analyst at Robert Baird & Co. “It’s a better outcome than a special dividend to Vivendi, and I expect Activision will function even better as an independent company without the overhang of a struggling parent.”

Stock Buyback?

Vivendi’s board approved terms of the transaction at its quarterly meeting on July 22, according to a person familiar with the discussions who wasn’t authorized to speak for the company.

In a statement, Vivendi said it plans to use part of the proceeds to strengthen its balance sheet and maintain debt ratings, and the supervisory board will decide on the use of the remainder. Options include a stock buyback, and deals to boost Vivendi’s media business, UBS AG analysts wrote in a note.

Vivendi’s main telecommunications division, SFR, is under pressure from low-cost offers by Iliad SA (ILD) as price wars enter their second year in France’s wireless market.

Chairman Fourtou promised investors a year ago, after ousting former CEO Jean-Bernard Levy, that he would reduce assets and refocus the company. Vivendi is seeking to shift its business from telecommunications to content. It owns Universal Music Group and pay-TV provider Canal Plus and will maintain some investment in Activision.

Kotick, who has led Activision for more than 20 years, had seen his largest shareholder transform from a stable, hands-off investor to a candidate for breakup. With ownership firmly back in his hands, Activision can purchase video-game companies overseas and invest more money to expand its reach, Pachter said.

Goldman Sachs Group Inc. and Barclays Plc advised Vivendi, while JPMorgan Chase & Co. was Activision’s adviser.

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Marie Mawad in Paris at mmawad1@bloomberg.net

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