UPDATE 1-Activision to spread its wings after Vivendi sale -CEO

Fri Jul 26, 2013 5:30pm EDT

By Malathi Nayak

SAN FRANCISCO, July 26 (Reuters) - Activision Blizzard Inc's CEO, who is shelling out $50 million of his own money in an $8.2 billion deal to buy back most of Vivendi's stake, said the world's largest video game publisher will be freer to pursue acquisitions and grow after emerging from its French parent's wing.

Bobby Kotick, one of the highest-paid and longest-running corporate chief executives in an industry ravaged in recent years by the rise of mobile gaming, told investors on a Friday conference call he thinks the company will be stronger as a result of the deal.

Activision shares surged 15 percent to close at $17.46, the highest since September 2008, on the Nasdaq.

Activision will have "the focus and flexibility to drive long-term shareholder value," Kotick said. "The importance of this transaction is that it gives us the opportunity to really reward our public shareholders and you see that in the accretion."

Vivendi agreed on Friday to sell most of its stake in the publisher of the blockbuster "Call of Duty" franchise for $8.2 billion, paving the way for a broader split of the French conglomerate's media and telecoms assets.

The deal, which will reduce the French firm's stake to 12 percent from 61 percent, fulfills Kotick's longstanding wish to buy back the company he had built into a games powerhouse since 1991. Activision merged with Vivendi's games division in 2007.

But the industry is struggling with shrinking demand for videogames as gamers shift away from traditional console titles to mobile games and free-to-play offerings online.

Vivendi is selling the shares in Activision, also known for its "Skylanders" title, for $13.60 each, a 10 percent discount to Thursday's closing price. Analysts said, however, the deal was positive for the company because it removed longstanding uncertainty around how Vivendi would deal with its U.S. unit.

There's no longer "this overhang, that this struggling parent company is going to use Activision and its resources to its own benefit to the detriment of Activision's shareholders," R.W. Baird analyst Colin Sebastian said. "That makes the shares worth more."

BIG MONEY

Activision did not reveal their future plans on Friday.

Kotick and Co-Chairman Brian Kelly are leading an investor group that will separately purchase about 172 million Activision shares, or a 24.9 percent stake, from Vivendi for $2.34 billion. The group includes Fidelity Investments and Chinese web portal Tencent, which will be a passive investor without a seat on the board, gaining Activision big-name backers.

Kotick and Kelly will personally invest $50 million each. The CEO received total compensation of $64.9 million last year, making him one of the top-paid U.S. CEOs. He has been a director and CEO of Activision since February 1991.

Activision itself is funding the deal with roughly $1.2 billion in cash and $4.75 billion by raising new debt, Chief Financial Officer Dennis Durkin told analysts.

Bank of America Merrill Lynch and JPMorgan have agreed to finance the deal, the company said.

"You've got a transaction that occurred at a discount and you've got insider buying as well. So when you look at all of that, the combination of it ends up being a positive one for existing shareholders," said Ed Williams at BMO Capital.

As of June 30, Activision had $4.55 billion in cash and investments and no debt. Under the deal, the company will pay Vivendi about $5.83 billion for its shares, leaving Activision with more than $3 billion in cash held mostly abroad.

The deal will reduce Activision's taxable income as it takes on some historical operating losses in Vivendi's U.S. holding company, Durkin said.

LONG-TERM VIEW

Consoles still account for more than half of the $66 billion - and growing - world gaming market, according to research firm DFC Intelligence. But playing games on smartphones and tablets, or as an offshoot to online social networks, is becoming more and more popular.

Sales of console devices and games have shrunk from month to month since 2012, chiefly because of aging console devices.

The industry is pinning its hopes for resurgent profits on Sony Corp and Microsoft Corp's next-generation video game consoles, which will go on sale this year-end holiday season.

But sales of the Wii U by Nintendo, released in late 2012, have been lackluster so far.

With the industry's shift away from consoles toward mobile and social gaming, casual games made by companies like Nintendo were more vulnerable to a slowdown than the mass-market action hits like "Call of Duty," said Sterne Agee's Arvind Bhatia.

Shooting games like Activision's immersive "Call of Duty" have not been impacted by that, he said. "That part of the industry is about to re-accelerate."

But others like R.W. Baird's Sebastian warned that Activision needed to protect its market share and cash flow.

"This console cycle will shrink versus the last cycle," Sebastian said. "You don't want to get too lost in the excitement of the launches and forget that in the living room there's a lot more competition from tablets, TVs and Internet. So I'm cautiously optimistic."

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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